Updated March 5, 2024
U.S. Capital Markets and China: Issues for Congress
Financial ties between the United States and the People’s
Beijing has encouraged firms to buy back shares while
Republic of China (PRC or China) had been expanding
tightening margin financing, in which investors borrow
since 2012. They have contracted since 2020 in the context
from brokers to invest. Similar to efforts in 2012 and 2015,
of China’s economic slowdown, reinvigorated capital
Beijing has directed a “national team” of state firms and
controls, and increased scrutiny from U.S. government
China’s sovereign wealth fund to buy shares to stabilize the
officials on U.S. investment in China.
market. Beijing reportedly aims to use $278 billion that
state firms hold offshore to boost the market.
As of December 2023, U.S. investors held $322 billion in
PRC (mainland China and Hong Kong) long-term securities
Based on SEC filings, CRS estimates that 277 PRC firms
(a 13.4% drop over 2022) while PRC holdings of U.S.
were listed on U.S. stock exchanges as of May 2023—up
securities rose by 4.5% to $1.87 trillion, according to the
from 248 in May 2021—with market capitalization of about
U.S. Treasury Department. Since 2020, U.S. net portfolio
$845 billion, about 1.7 % of the estimated $50 trillion in
investment flows into China have fallen with a sharp drop
total U.S. equity market capitalization. One firm (Alibaba)
in 2022 and over $30 billion in net outflows in 2023. This is
accounts for about one fourth of China’s total U.S. market
the first time since 2018 that China has had a net outflow of
capitalization. PRC firms listed on U.S. exchanges include
funds. Investments in China by U.S. private equity (PE)
firms in sectors prioritized in PRC industrial plans. In 2023,
funds fell from $140 billion in 2019 to $93 billion in 2021
the average deal size of U.S. IPOs by PRC firms fell by
and $4 to billion in 2023, according to the data firm Preqin.
93% from 2021 levels, marking the lowest level in 20 years,
according to Ernst and Young. In 2023, 24 PRC firms
Congress is debating whether or not to encourage or restrict
raised about $656 million in U.S. IPOs. Hesai, a PRC
financial flows, and is considering efforts to adopt
LiDAR firm, raised $190 million (29% of the total). Shein,
enhanced disclosure and audit requirements. Congress also
a PRC digital fashion firm, filed in 2023 for a U.S. IPO.
is considering legislation that would restrict U.S.
investments in PRC state and military-tied firms and PRC
While the PRC government maintains a closed capital
strategic sectors.
account, since 2012 it has accelerated efforts to develop
Capital Markets Investments
China’s capital markets. These efforts include allowing
some foreign institutional and retail investors to buy shares
The United States has the largest capital market in the
in PRC firms listed on China’s exchanges through qualified
world, far surpassing Europe, the second largest market.
institutional investor programs and stock connect programs
(Figure 1). U.S. listings and PE and venture capital (VC)
via Hong Kong. Domestic and foreign capital markets have
ties offer PRC firms U.S. capital and paths to build brand
become a key source of capital for PRC firms in technology
recognition, and expand in China and overseas.
and strategic sectors. Since 2006, the PRC government has
Figure 1. Global Equity Market Cap Share (2023)
adopted a VC model that pools state and foreign monies in
state-tied funds and foreign VC and PE activity.
Securing market access in China remains a key concern for
U.S. financial firms. To date, Beijing has created limited
openings in China’s debt and equity markets, and allows a
few U.S. firms to operate wholly-owned funds that spur
U.S. investment. Morgan Stanley Capital Index (MSCI), a
widely followed benchmark, has included PRC stocks since
2017; five major index fund providers include PRC bonds
and A-shares of firms listed on PRC exchanges.
At the same time, China is taking steps that appear aimed at
shifting U.S.-PRC investment activity to PRC exchanges.
Since 2016, China’s securities regulator has directed PRC
firms to list on PRC exchanges and in Hong Kong. As of
January 2023, all PRC firms managed by China’s State
Council had de-listed from U.S. exchanges. Since 2021,

Beijing has also enhanced controls of overseas listings. In
Source: CRS, with data from the Securities Industry and Financial
December 2021, Beijing pulled back the U.S. listing of
Markets Association (SIFMA)
DiDi Global, part of China’s largest ride-sharing service,
Investor confidence in China’s equity markets has dipped
citing the need for a data security review. The PRC
with China’s economic slowdown. China’s blue-chip index,
government has assumed a new shareholding position in
the CSI 300, had declining returns from 2000 to 2023.
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U.S. Capital Markets and China: Issues for Congress
several firms, and, since February 2023, requires a national
(ADRs), a structure that allows a U.S. financial institution
security review for all PRC firms listing overseas.
to sponsor a secondary U.S. exchange listing of a foreign
Issues for Congress
firm. The parent firm’s stocks are listed in the United States
through a contract that bundles the firm’s stock certificates.
PRC Corporate Structures
Most PRC firms are required to file an SEC 20-F annual
Congressional attention has focused on PRC firms’ use of
report for foreign issuers, but there are exemptions on
complex structures, such as the variable interest entity
specific disclosure requirements. For ADRs, the SEC relies
(VIE). Some Members have proposed stronger disclosure
on foreign government reporting and disclosures, and that
rules (S. 855 and H.R. 499) to address how these structures
can create transparency gaps.
may obscure risks and state ties and shield PRC parent
U.S. Financial Investment in PRC Strategic Sectors
firms and core assets from U.S. legal recourse. In a review
of filings, CRS estimates that two-thirds of all PRC U.S.-
The Treasury Department and some Members say they are
listed firms—including Alibaba, Baidu, and Tencent—use a
disinclined to restrict financial flows, noting that the United
VIE structure to address PRC restrictions and gain
States benefits from an open investment climate. Instead,
flexibility in operating overseas. A VIE structure involves
Treasury has sought restrictions that are “narrowly targeted
the owners of a PRC firm creating an offshore holding
at investments in highly sensitive technologies and products
for the purposes of protecting U.S. national security.”
company in which foreign investors can purchase an equity
Other
claim. The holding company is tied to the “parent” through
Members and policymakers say U.S. investments, including
a series of contracts and revenue sharing agreements that
passive financial investments, support China’s military and
mimic ownership arrangements but do not provide the same
strategic sectors. They note that U.S. index funds include
rights typically afforded to investors in U.S.-listed firms
PRC military and state-tied firms. In February 2024, the
(Figure 2). The contracts underpinning the VIE allow the
House Select Committee on Strategic Competition with the
PRC owner(s) to move funds across the business while
Chinese Communist Party determined that several U.S. VC
creating a firewall between the listed entity and the core
firms invested over $3 billion in PRC firms tied to the
assets and licenses held by the PRC owner.
military, industrial policies, and human rights abuses.
Figure 2. Outline of a Typical VIE Structure
The U.S. government has taken several actions to address
risks U.S. investments may pose. In May 2020, U.S.
policymakers convinced the U.S. government’s Thrift
Savings Plan board to defer a decision to tie its international
fund to an index that includes PRC firms. A June 2021
Biden Administration Executive Order (E.O.) 14032
prohibits U.S. persons from investing in named PRC
military firms. In February 2024, the U.S. Department of
Defense listed a PRC investment firm, IDG Capital, as a
military firm. Some Members have sought to expand the list
of firms and sectors and restrict capital flows. In August
2023, the Biden Administration issued E.O. 14105,
directing Treasury to create a program to regulate certain
U.S. investments in China’s semiconductors, artificial
intelligence, and quantum sectors. H.R. 6349 proposes to
codify the E.O. in statute and expands the sectors it covers.
U.S. Investor Protections
In 2020, Congress passed the Holding Foreign Companies
Source: CRS, with information from multiple sources.
Accountable Act (HFCAA) (P.L. 116-222) to address PRC
VIE arrangements have no definitive legal standing in
firms’ noncompliance with U.S. statutory audit
China, which may leave U.S. investors without recourse.
requirements. HFCAA requires PRC firms to disclose state
SEC 20-F disclosures by some firms acknowledge the risks
and military ties and delist from U.S. exchanges if terms are
of VIEs, noting that the VIEs are incorporated offshore,
unmet. In August 2022, PRC officials agreed to an initial
conduct most operations in China, and have executives who
auditing framework to allow the U.S. review of the work of
reside outside the United States. Use of the VIE structure
PRC-based accounting firms that audit PRC-based firms
allows PRC firms to take actions such as shifting business
listed on U.S. exchanges. Since 2021, the SEC has
licenses and issuing off-the-books bonds, potentially
increased scrutiny of PRC firms. In July 2023 it issued
reducing shareholder value and leaving no clear avenue for
guidance on disclosure obligations for PRC firms. Congress
legal recourse. In 2010, for example, Alibaba cut out Yahoo
could consider whether or not to require the SEC to
(a 43% stake investor) in its spinoff of the online payment
augment these rules with more details on state ties and
firm Alipay to a separate VIE. In February 2021, global
beneficial ownership and to verify the completeness and
investors reportedly had no alternative exit strategy or legal
accuracy of PRC filings. Congress also could consider
rights for an estimated $10 billion invested in an offshore
whether or not to require the SEC to make the U.S.-China
shell company after the PRC government suspended Ant
auditing deal public; report on HFCAA implementation;
Financial’s $34.5 billion IPO in Shanghai and Hong Kong.
and issue China investment bulletins.
U.S. listings of PRC firms often represent a small portion of
a firm’s shares and do not include core assets of the PRC
Michael D. Sutherland, Analyst in International Trade and
parent. Some firms use American Depositary Receipts
Finance
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U.S. Capital Markets and China: Issues for Congress

IF11803
Karen M. Sutter, Specialist in Asian Trade and Finance


Disclaimer
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https://crsreports.congress.gov | IF11803 · VERSION 3 · UPDATED

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