Cmte Present Danger China - Letter to President Biden 8.2.2021

Hon. Joe Biden
President of the United States of America
The White House
1600 Pennsylvania Avenue, N.W.
Washington, D.C. 20500
August 2, 2021
Dear Mr. President:
Thanks in part to a bilateral U.S.-China Memorandum of Understanding (MoU) that you helped
secure in May 2013, American investors just lost over $400 billion in the value of Chinese
Communist Party-tied companies that have access to our capital markets without complying
with U.S. federal securities laws and other regulations governing corporate disclosure,
accountability and governance.
As you know, the 2013 MOU removed any requirements for Chinese companies to submit
themselves to Public Companies Accounting Oversight Board (PCAOB) covered audits. China is
the only country in the world that has a free pass given to them by the Securities and Exchange
Commission (SEC) and PCAOB. This gives China the opportunity to take advantage of what
amounts to an “open season” on unwitting US investors.
The MoU granting preferential treatment to Chinese companies in our own markets and the
subsequent, deep penetration by the CCP of the investment portfolios of scores of millions of
unwitting American investors also pose a serious threat to our national security and human
rights values. In light of the financial bloodletting of “Red July,” the May 2013 Memorandum of
Understanding must be terminated at once.
Fortunately, there is overwhelming bipartisan support for restricting the access of noncompliant
and sanctioned Chinese Communist Party-tied companies to the U.S. capital markets
and American investment dollars worldwide. The “Holding Foreign Companies Accountable
Act” was unanimously adopted by the Congress in 2020 and legislation to accelerate its
implementation was similarly unanimously approved by the Senate earlier this year, a fact
noted by seven Senators on July 28 th in a letter to Securities and Exchange Commission
Chairman Gary Gensler.
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Particularly striking was the Senators’ condemnation of Wall Street's complicity in expanding
American investors’ exposure to non-transparent and malevolent Chinese companies:
According to the U.S.-China Economic and Security Review Commission, as of October
2020 there were 217 Chinese companies listed on U.S. exchanges, including 13 companies
that are claimed by the CCP as Chinese state-owned enterprises. We have serious doubts
that these companies are in compliance with U.S. transparency requirements. Also of
concern, many Chinese companies, including [the Chinese ride-sharing app] Didi, utilize
Variable Interest Entities (VIE) which are essentially shell companies set up in the
Cayman Islands to satisfy both countries' regulators. These companies can tell the CCP
that it is still wholly held by Chinese nationals, while they allow Western shareholders
access.
Equally concerning is that many of the largest U.S. underwriters have enthusiastically
collected billions in fees and profits from these Chinese firms being listed on U.S.
exchanges. Asset managers and index providers similarly profit by including Chinese
firms in investment offerings and prominent indexes, including those used by the
federal government's Thrift Savings Plan. These American financial institutions do this,
while seemingly looking the other way on transparency, the risks of CCP influence, and
CCP human rights violations, all to the detriment of the American retail investor and
other U.S. interests.
The Senators are right to warn about Variable Interest Entities. Owning a VIE share is
analogous to playing fantasy football with American investors. Unlike capital structures where
equity investors have a claim to assets behind the banks and bondholders, U.S. investors have
no claim to anything in the event of a bankruptcy.
The Senators are implicitly raising an alarm about another favorite of the CCP and its “old
friends” on Wall Street: the inclusion of Chinese Communist companies’ so-called “A
shares” in index funds, especially Exchange-Traded Funds, benchmarked against various
indices such as those offered by MSCI, FTSE Russell, S&P and others. These passive
investment vehicles – and the many unregulated corporate A shares they include –
represent the single greatest capital markets threat to America's national security and
fundamental values. Certain of these A share companies are aiding and abetting genocide,
equipping concentration camps, engaging in slave labor, helping manufacture advanced
Chinese weapons systems destined to target U.S. forces, militarizing illegal islands in the
South China Sea, and the list goes on. How this can be permitted to continue another day
without urgent remedial action -- specifically, banning the holding of Chinese A shares by
U.S. persons worldwide -- is both baffling and intolerable.
To minimize the risk of any more devastating U.S. investor losses in non-compliant and/or
malign Chinese stocks and bonds, and other transfers of wealth from the American
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investing public to the coffers of the CCP, we call on you to direct your Wall Street-friendly
Securities and Exchange Commission, as well as Department of the Treasury, to ban
forthwith: 1) the use of fraud-prone VIE structures for listing or trading on U.S. exchanges:
and 2) the holding by U.S. persons worldwide of A shares drawn directly from Chinese
domestic exchanges and sluiced by BlackRock, Vanguard and other U.S. fund managers
directly into the retirement and other portfolios of as many as 100 million or more
Americans retail investors.
Sincerely,
Kyle Bass
Member
Brian T. Kennedy
Chairman
cc:
Hon. Kamala Harris
Hon. Jake Sullivan
Hon. Janet Yellen
Hon. Tony Blinken
Hon. Lloyd Austin
Hon. Gina Raimondo
Hon. Brian Deese
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