Wall Street Execs Recognize Need to Restrict Flow of US Capital to China: Gallagher

NEW YORK—Wall Street leaders have expressed a general willingness to pull back investment from China, according to House China Committee Chairman Rep. Mike Gallagher (R-Wis.).

On the first day of his two-day stopover in New York, Mr. Gallagher, along with seven other members of his committee, hosted top Wall Street figures at a tabletop exercise to game out the implications of an economic competition with the Chinese Communist Party (CCP) over Taiwan.

Even with the executives who are more dovish on China, Mr. Gallagher said he was surprised to see a “general recognition that we need restrictions on US capital flowing to China in certain areas.”

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“So nobody was pushing back against the principle. It’s just a question of how you get it right—like what’s the best way to regulate it,” he told The Epoch Times on Sept. 12, adding that he found the situation encouraging.

President Joe Biden signed an executive order in August to regulate outbound investment tied to China, on sensitive technologies such as artificial intelligence, quantum technology, and semiconductors, that could aid Beijing’s military advancements.

Mr. Gallagher believes the scope of the restrictions can be much broader to cover “anything associated with the [China’s] military-industrial complex,” be it space technologies, hypersonics, or biotechnology.

“I think we could legislate a solution that goes further than the Biden executive order, and that obviously lasts beyond the Biden administration to do this right.”

“Every day that we keep funding the CCP’s military ambition,” he said earlier at a hearing at Peterson Hall in Manhattan, “we make conflict in the Indo-Pacific more likely.”

And if China were to invade Taiwan, the losses across U.S. financial systems would “dwarf the write-downs taken at the outset of the Russia-Ukraine war,” he added. “The entire U.S. economy and banking system would be imperiled. Equity markets would drop precipitously as global shipping lanes closed, shipping insurance premiums skyrocketed, supply chains broke down, and the specter of global conflict grew. Americans would see their pensions shrink and their bank accounts hemorrhage cash.”

But even beyond an invasion of Taiwan, which Mr. Gallagher described as a “worst case scenario” he hopes to avoid by engaging with Wall Street executives, the business climate in China has been turning increasingly hostile.

“American investors in China are like the proverbial frogs slowly boiling in a pot of water,” Mr. Gallagher said, adding that “taking on a genocidal, communist regime as a business partner is not a recipe for success,” but one for “systemic risk.”

Mr. Gallagher, who believes an eventual selective decoupling is inevitable, believes that “people are waking up to the risks.”

U.S. hedge funds such as Coatue, D1 Capital, and Tiger Global have cut their exposure to the Chinese market in the second quarter. A May poll of Fortune 500 CEOs shows that 41 percent are reducing investment in China because of “political and reputational risk” while only half as many want to expand their presence in the country.

In his testimony to the Select Committee on the CCP, former chair of the U.S. securities regulator Jay Clayton proposed that companies disclose their China risk if their market capitalization exceeds $50 billion, have a China-based cost or revenue of over $10 billion annually, or if ending their China ties would have a material impact on their business prospects.

“This is not about liability, it’s not about ‘gotcha’—it’s just about in the boardroom, if you have a substantial exposure to China, how have you thought about the type of risks that you’re talking about if they come to fruition and provide that information to investors,” he said at the hearing.

Mr. Clayton agreed with Mr. Gallagher on the importance of having a lasting solution from the government to help insulate the United States from financial risks in China.

“Given clear and coherent direction from governments, the power of the market to respond to policy is remarkable,” he said, pointing to the Western sanctions on Russia. “They were comprehensive, they were bilateral, and immediately, people pulled back.” The ramifications for Moscow has caused people on Wall Street to look at a potential similar scenario with China and think about ways to de-risk, he said.

“You may hear a little bit of pushback from some, [but] I think the vast majority of people in the financial community, a vast majority of citizens—if Congress draws those lines, they’re going to follow,” he added. “We are a compliant society, in terms of our capital flows.”