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U.S. lawmakers are stepping up efforts to ban funds from investing in Chinese companies to address the strategic, commercial and national security risks that the Chinese government poses to the U.S. economy and financial markets.
Bipartisan representatives from the U.S. Congressional Caucus of Certified Public Accountants have announced a bill entitled the China Ban on Index Funds Act, which includes civil penalties for violations of the bill.
Brad Sherman, a co-author of the bill, said that while index funds minimize expenses by simply investing in all companies in a particular market sector without carefully scrutinizing individual companies, this strategy said it did not take into account the “unique challenges” of valuing Chinese companies. Leaders of the Capital Markets Subcommittee, part of the U.S. House of Representatives Financial Services Committee, said in a statement.
“I try not to include Chinese stocks in index funds because they don't look into the risks these companies pose,” he added.
This article was previously published by Ignites Asia, a title owned by FT Group.
The bill does not provide detailed steps to impose these restrictions, but it does state that the U.S. Securities and Exchange Commission “may issue regulations necessary to implement this provision.” ing.
Proposed penalties for this action include fines of up to $250,000, or twice the amount of the transaction underlying the violation.
The China Ban on Index Funds Act is one of four bills introduced by Democratic Rep. Sherman of California and Republican Rep. Victoria Spartz of Indiana.
The other three bills would “repeal tax breaks on Chinese stocks, limit access to U.S. capital markets for sanctioned Chinese companies, increase transparency of risks to U.S. companies, and provide incentives for individual investors and retirement savings.” The goal is to reduce the exposure of other Americans to these risks. According to a statement from the lawmakers.
Sherman and Spaatz identified the U.S. Adversaries Capital Gains Prohibition Act as the group's “most important.” The measure targets the elimination of capital gains tax breaks for investments in companies based in China, Russia, Belarus, Iran and North Korea.
“It makes no sense to give up American tax dollars to encourage Americans to invest in the Chinese economy,” Sherman said.
He added: “This is unfair because China provides tax incentives to Chinese investors, but not to investors investing in U.S. stocks.'' There is,” he added.
“As a former Big Four auditor for a publicly traded multinational company, I understand the risks that a lack of transparency and proper auditing of Chinese operations poses to financial markets and U.S. investors,” Spartz said.
“Congress owes the American people a duty to protect our hard-earned dollars from foreign adversaries like China by demanding transparency and eliminating perverse incentives.”
The bill would add to a growing number of bills aimed at curbing U.S. private investment in China, the world's second-largest economy.
Last year, US President Joe Biden signed an executive order restricting investment in three key areas of Chinese advanced technology.
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Hedge funds, private equity and venture capital firms, as well as pension and university endowments and investment giants such as BlackRock and MSCI, are being scrutinized, questioned and the subject of other legislation.
The Senate has proposed the Foreign Adversary Investment Disclosure Act of 2023, which would require private funds, which are not subject to the same disclosure rules as publicly traded companies, to annually disclose assets invested in China to the U.S. Securities and Exchange Commission.
In August, Mike Gallagher, chairman of the U.S. House of Representatives Select Committee on China, announced restrictions on investment in China, including restrictions on “problematic” investments such as U.S. holdings of Chinese stocks and bonds and trading in investment funds that include Chinese companies. He called for stricter restrictions.
*Ignites Asia is a news service for professionals in the asset management industry published by FT Specialist. Trials and subscriptions are available at: ignitesasia.com.
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