Dec 14, 2023 - Business

Congress wants to further limit U.S. investment in China

Illustration of a hand reaching out and pushing the large star on the Chinese flag is if it were a button.

Illustration: Aïda Amer/Axios

When the Biden administration recently proposed a ban on outbound investments to China, it focused almost exclusively on private tech deals.

What's new: Congress is coming for most everything else.

Driving the news: A bipartisan House committee on Tuesday released a landmark report arguing the the U.S. needs to "reset" its economic relationship with China, including much more extensive investment restrictions.

  • It called Biden's executive order an "important first step," but argues that the restricted technology definitions are too narrow and that there shouldn't be as many carveouts for passive public equity investments (including via ETFs).
  • Then the committee dropped this: "Congress should also enact legislation that requires private equity firms, as well as employee retirement plans governed by ERISA, to disclose their continuing investments in companies based in or controlled by foreign adversaries. Congress should consider and discuss proposals to end purchases of any further interests in those entities."
  • Or, put more simply, no more U.S. private equity investment in China-based companies.

But, wait, there's more: The committee also wants to encourage quicker divestment of existing investments in Chinese companies, and reinvestment of that capital into U.S. businesses.

  • Per the report: "Enact legislation to ensure capital gains and dividends made from investing in the PRC are not taxed at a lower rate than American workers' salaries. Congress should give investors a one-year period to divest from PRC entities then tax investment in the PRC at the same rate as ordinary income. At the same time, it should defer capital gains taxes for investments shifted to strategic sectors and small businesses in the United States."

Zoom out: This report also could signal a death knell for the World Trade Organization, whose 2001 admission of China began decades of accelerated globalization.

  • As Axios China's Bethany Allen-Ebrahimian writes: "The committee calls for like-minded countries to form a new multilateral organization that excludes non-market economies if China's approach to economic governance can't be brought into line with WTO standards."

The bottom line: So far this is just 52 pages of analysis and recommendations, but it's very clear which way the legislative winds are blowing.

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