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Crossing the Red Line: The Perils of US Investment in Chinese Defense Firms

Representative Mike Gallagher, a key legislator from Wisconsin, has urged the Biden administration to tighten the reins on US investments in China. The lawmaker voiced his concerns in a letter to the President, warning of the potential risks associated with American capital funding Chinese defense firms.

Gallagher emphasized the need for the impending White House executive order to extend its investment limits beyond direct contributions from private equity and venture capital funds. The legislator highlighted that restrictions should also encompass Chinese public markets, which offer trade in stocks and bonds.

Gallagher painted a grave picture, stating, “If American capital continues to flow to Chinese military companies, we are at risk of funding our own destruction.” The legislator, who chairs the House Select Committee on the Chinese Communist Party, cautioned that Wall Street’s funding of key technology sectors in China could endanger US military personnel, bolster targets of the Chinese Communist Party’s human rights abuses, and elevate systemic risks for the global economy.

In his letter, Gallagher shared estimates indicating that US private investments in China have already crossed the $200 billion threshold. In stark contrast, the legislator revealed that over $1.1 trillion of US capital is locked up in stocks and bonds traded on China’s public markets. According to him, a significant share of these investments supports tech companies closely linked with China’s military and the Chinese Communist Party.

Gallagher expressed his concern about the lack of a mechanism within the US government to mandate disclosure of or restrict capital outflow into foreign companies that could pose a threat. His comments dovetail with the US’s previous attempts to stymie Chinese access to crucial technologies like semiconductors, quantum computing, and artificial intelligence.

His committee is currently investigating the roles of BlackRock and MSCI in channeling American investments into shares of Chinese companies that have previously been flagged by the US due to security concerns or human rights violations. The Wall Street Journal reported that the congressional panel discovered that American investors have funded 60 such companies, with BlackRock investing $429 million across five funds.

At the same time, foreign investors have shown a waning interest in China, as the nation’s post-COVID economic recovery falls short of expectations. This call for tighter investment controls on China from a US lawmaker brings to the fore the need for greater transparency and more robust safeguards in international investment practices.