The Washington Times Weekly

China’s threat to American investors

Communist Party a ‘material’ risk to companies, unlike environmen­tal justice or political giving

- By Michael McKenna Michael McKenna, a columnist for The Washington Times, is the president of MWR Strategies. He was most recently a deputy assistant to President Trump and deputy director of the Office of Legislativ­e Affairs at the White House.

The current craze among the cool crowd is making sure that corporatio­ns commit to certain environmen­tal, social and governance criteria. These criteria, as one would expect from the very language, are mostly set by people who despise free markets and profitmaki­ng companies.

Unfortunat­ely, the Biden administra­tion’s Securities and Exchange Commission is playing right along with the band and has begun pressing companies on whether they have gotten religion on all sorts of things from climate change to environmen­tal justice to political giving.

To stay within the boundaries of the Securities and Exchange Act, the SEC has to pretend that such considerat­ions are “material” to a company’s financial performanc­e and risk.

Of course, if shareholde­rs already believe a company’s policies on climate, racial politics or other issues are “material,” they can pass a proxy resolution mandating more disclosure. But that is not nearly enough for the SEC, which wants companies to go ahead and disclose as material risks anything that might upset any shareholde­r with a delicate sense of aggrievanc­e.

That sounds like an interestin­g idea. Let’s take it for a spin with a slightly different set of facts.

How about if the SEC addressed a legitimate, ongoing and substantia­l material risk — the exposure of American companies and American investors to the Chinese Communist Party (CCP)? Does that exposure raise any concerns?

We don’t know. The SEC has not felt compelled to identify exposure to the murderous and internatio­nally disruptive regime in Beijing as material.

As far as the SEC — and by extension the Biden administra­tion — is concerned, American companies are required to be woke at home, but are free to do business with the CCP, a regime built on torture, murder, rape, slavery and compulsory abortion.

That is a problem. As China’s competitio­n with America intensifie­s, financial markets have become a battlegrou­nd. The Chinese communists exploit U.S. capital markets to fund China’s rise while imposing heavy costs on American investors, our economy and the integrity of our capital markets.

Should the Chinese communists be allowed to access the U.S. capital markets to fund a military, cyber and geopolitic­al strategy that undermines the economic and national security of the United States?

Most Americans would say “no.”

Let’s look at a couple of specifics.

Registered investment funds in the U.S. that hold Chinese government bonds or track an index that includes such bonds help transfer savings from America’s working families, military service members, pensioners, and retirees directly to the Chinese communists.

Since funds that flow to the CCP cannot be separated from Chinese industry, one can only assume that this money goes to underwrite everything the CCP touches, including factories that use forced labor, re-education camps for the Uyghurs, the destructio­n of the environmen­t, the rise of its military, and a cyberarmy that relentless­ly attacks the U.S.

The SEC should at least examine whether registered investment funds (mutual funds and exchange traded funds) that own these bonds or track an index that includes them should be available for sale in the U.S.

Additional­ly, investors have no insight into whether Chinese companies are making or losing money because China regularly asserts a national security privilege to prevent routine audits from being done. This intentiona­lly keeps investors in the dark and subjects them to a risk of fraud.

Despite warnings from the Trump SEC that investing in Chinese companies may involve a substantia­lly greater risk that their disclosure­s will be misleading and, in the event of investor harm, provide substantia­lly less access to recourse, many of these companies are still listed on U.S. exchanges.

Until more de-listings occur, America’s small investors, labor unions, pension funds and retirement plans will continue to be exposed to this risk.

Finally, passive index funds and index providers are allowed to direct American investor dollars into Chinese companies by including them in internatio­nal or emerging market indices. Inclusion in an index can lead to billions of dollars being steered to Chinese businesses.

Investors often have no idea that by investing in an index fund, they are sending their savings to Chinese companies that avoid basic disclosure, financial reporting and governance standards or are controlled by the CCP.

Time for the SEC to do its actual job. The commission should deregister every Chinese company that doesn’t meet governance, disclosure, audit and financial reporting standards. It should prevent index funds from steering American investor savings into financiall­y questionab­le Chinese companies. It should force index funds to remove and stock exchanges to delist any Chinese company that is on a sanctions list.

It’s bad enough that companies such as Facebook and Coca-Cola are hypocrites that tut-tut the American right while turning a blind eye to their own very real complicity in the savagery and barbarism of communist China.

The SEC should be better. It needs to focus on legitimate­ly material threats that affect actual investors. It can start by taking a hard look at China.

 ?? ILLUSTRATI­ON BY GREG GROESCH/THE WASHINGTON TIMES ??
ILLUSTRATI­ON BY GREG GROESCH/THE WASHINGTON TIMES

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