In a leaked memo, the White House floats the idea of capital controls.
Last week, Bloomberg News reported that the Trump administration is considering a “financial decoupling” from China, citing a leaked memo that proposes sweeping restrictions on capital moving in and out of the country. The proposal would bar Chinese firms from listing on U.S. exchanges, limit American pension investments in Chinese markets, and cap the value of Chinese securities in American indexes. With an impending tariff increase from 25 percent to 30 percent on $250 billion of Chinese goods planned for October 15 and further tariffs slated for December, the prospect of capital limits add a new dimension of uncertainty to the U.S.–China trade war — and responses to the idea illustrate a rift between policymakers and the business community on the China question.
The White House denied the report, but not everyone is convinced. On Wednesday, Raymond James analyst Ed Mills wrote: “The current political environment means these efforts will likely gather steam.”
Indeed, the proposal reflects a bipartisan legislative effort spearheaded by Senator Marco Rubio (R., Fla.). In June, Rubio, along with senators Tom Cotton (R., Ark.), Bob Menendez (D., N.J.), and Kirsten Gillibrand (D., N.Y.), cosponsored the EQUITABLE Act, which would “delist foreign companies that do not comply with U.S. accounting and oversight regulations from American exchanges.” That bill would, if implemented, give Chinese firms three years to either alter their financial reporting practices or be cut off from the world’s largest capital market.
According to these senators, access to American markets is a privilege, not a right. In December 2018, the Securities Exchange Commission (SEC) and Public Company Accountability Oversight Board (PCAOB) said as much in a report on Chinese business practices: “A U.S. listing carries with it the assumption that U.S. rules and regulatory oversight apply.” But Chinese law requires that companies’ books and records be kept within the country, and restricts foreign audit work papers from being transferred outside of China. According to the SEC/PCAOB report, these laws reduce broad market confidence, while also allowing unscrupulous actors to hide fraud, an argument Rubio recently echoed in the Wall Street Journal.
Nevertheless, some observers reject capital controls as too heavy-handed, arguing that market participants should be free to take risk on Chinese firms. Stephen Roach, an economist and senior fellow at Yale University, told National Review that any implementation of capital controls would be an “unmitigated disaster.” Chinese companies with audit risk will be “priced accordingly,” he says, and “investors who want to take their chance on poor audits are free to do so.” Mary E. Lovely, senior fellow at the Peterson Institute on International Economics, also expressed skepticism: Delisting Chinese companies would “undermine international confidence in American financial markets” and “increase the attractiveness of other exchanges,” she says.
A true financial decoupling would be a wrenching process. Asset managers would be hard-pressed to avoid China given its inclusion in index funds, which permit investors to track broad market trends rather than pick individual stocks. The Federal Retirement Thrift Investment Board (FRTIB), which manages retirement accounts for public employees, has used the MSCI “All Country World ex-US” Index as a benchmark since 2017.
Lovely told National Review that restricting investment in this index means “U.S. investors will miss the long-term growth opportunities provided by Chinese firms.” China hawks in Washington view that as a pill Americans have to swallow. In a Monday op-ed, senator Rubio and his Senate colleague Jeanne Shaheen (D., N.H.) argued that the FRTIB’s investment in the MSCI index funnels American retirement savings “directly to a regime that poses one of the greatest threats to our nation’s long-term security and prosperity” and helps capitalize, among other things, Chinese surveillance practices.
This debate — D.C. China hawks on one side, business-community doves on the other — underscores a broader rift. Since the 2016 election, Washington has reached a general consensus that China’s policies harm the global trading system. But investors eager to participate in Chinese growth feel handicapped by restrictions, and many economists remain skeptical of an interventionist approach. The rift has played out within the White House, where national-security officials and economic policymakers have occasionally found themselves at loggerheads on China.
Under normal circumstances, improving Chinese auditing standards might be seen as facilitating the integration of China into the global financial system. But in the context of an acerbic trade war, even minor reforms to the multilateral trading system are often interpreted as protectionist. In an effort to defend the so-called “rules-based international order,” China doves risk placing a waning emphasis on the rules.