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Rep. Brad Sherman (D-Calif.) and Rep. Victoria Spartz (R-Ind.) have introduced four bills that would limit or discourage U.S. investors from investing in China. These bills were referred to the U.S. House Financial Services Committee on March 20th.
The China Ban on Index Funds Act prohibits index-tracking funds from owning Chinese securities 180 days after the bill’s passage. Sherman’s office said passively managed index funds do not perform the same due diligence in selecting and monitoring assets as active funds, and therefore do not carefully examine the risks specific to Chinese companies.
Therefore, this bill does not affect actively managed funds. The bill also does not distinguish between index funds that track indexes specifically for Chinese securities and index funds that simply include Chinese securities. This is an important distinction because, according to Securities and Exchange Commission requirements, an index fund only needs to match 80% of the index to be considered an index fund.
As an example of how broadly such a ban would apply, the MSCI All Country World Index is a global stock index that measures stock performance in 23 developed and 24 emerging markets. As of February, the index includes nearly 3,000 companies, covering approximately 85% of the global investable equity opportunities set, according to information from MSCI. As of last month, Chinese companies accounted for 7.12% of the index weight in the MSCI ACWI index (a type of index) that excludes US investments. There were nearly 90 funds in the U.S. that used the fund as a benchmark, according to February data from Simfund, which, like CIO, is also owned by ISS STOXX.
Another bill in the package, the U.S. Adversaries Capital Gains Prohibition Act, would subject income from securities in “concerned countries” to income tax rather than capital gains. “Countries of concern” are defined by law as Belarus, China, Iran, North Korea and Russia.
A spokesperson for Mr. Sherman’s office said that in the case of co-investment vehicles, such as mutual funds, managers must track what proportion of the fund is from “countries of concern” and that they cannot attribute their holdings to them. It was clarified that only the growth amount would be taxed as income. . For example, a mutual fund that has his 40% exposure to China and his 60% exposure to countries that are not “concerned countries” means that upon distribution, his 40% of the gain will be taxed as income and 60% will be taxed as capital. It is taxed as a gain.
The spokesperson also clarified that the bill would not affect the tax status of retirement plans or other tax-advantaged accounts.
Another package, the China Risk Reporting Act, would require U.S. publicly traded companies to disclose material risks arising from supply chain dependence on China, including measures to minimize risks. Descriptive disclosure of the company’s actions should be included. . Potential sources of China risk identified in the bill include rule of law issues in China, biased judicial procedures, intellectual property theft, and disputes between the United States and China.
Finally, the China Military and Human Rights Capital Market Sanctions Act requires the President to develop a list of covered entities within 90 days of the bill’s passage. U.S. investors would be prohibited from trading securities offered by these companies and would be required to sell those securities. This list will include companies on the Specially Designated Nations and Blocked Persons List, the Non-SDN Chinese Military-Industrial Complex Enterprises List, and the Other Chinese Military Enterprises List.
The sanctions bill imposes up to 20 years in prison for any U.S. investor who “willfully violates, knowingly attempts to violate, knowingly conspires to violate, or aids or abets a violation of this Act.” . Of the four cases, this is the only one in which criminal penalties were imposed.
HK Park, managing director of Washington, D.C.-based risk advisory firm Crampton Global, said the high volume of bills related to Chinese investments is making it difficult for investors to prepare for compliance. He says there is. As a result, some GPs have called for ‘national security assessments’ to be carried out on all potential target companies with links to China or Russia, both within and outside the two countries. ”
Park added that even the likelihood of the bill becoming law is a concern for investors, adding that “some LPs are applying hedging strategies to companies whose values could decline due to future geopolitical actions.” “We are asking you to conduct a national security assessment of your current portfolio so that we can do so,” he added. For example, ByteDane is due to the proposed forced sale of his TikTok. ”
The Securities Association of America strongly supported this package of legislation. ASA President and CEO Chris Iacovella said in his statement:Banning Chinese stocks from index funds would protect American investors and allow the Chinese Communist Party to use American capital to fund military technology, indiscriminate climate destruction, and gross human rights abuses. This will prevent you from doing so. ”
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