US should expand investment restriction on Chinese company to protect investors and national security, government advisory panel says

The US-China Economic and Security Review Commission (USCC), an independent government panel set up in October 2000, said Beijing’s crackdown on technology companies – many of which are listed on US exchanges – led to billions of dollars in losses for US investors.

The commission said that the US should require additional risk disclosures from Chinese companies as well as from US brokerage firms to protect American investors from regulatory uncertainties.

The Treasury Department should put together a report each year on portfolio investments by US investors in Chinese companies, it added. The list should include US capital in specific Chinese industries, the types of US institutions that invest in Chinese firms, and any exposure to Chinese businesses on US blacklists.

“Our recommendations are not designed to prevent American businesses from investing in Chinese businesses,” said Bob Borochoff, a commissioner of the panel, on Wednesday. “They are designed to give Americans an opportunity to know what they are investing in and to prevent Americans from investing, inadvertently, in forbidden businesses.”

The variable interest entity (VIE) is one area of concern. The structure has helped Chinese companies bypass Beijing’s restrictions on overseas listings by selling shares through an offshore entity, but it is risky for US investors because such entities do not own the underlying assets. In cases of bankruptcy, these investors would have limited chance to recuperate their capital.