U.S. Sen. Marco Rubio introduced a new bill that would restrict U.S. banks, insurers and other financial institutions from investing in certain Chinese companies, marking another escalation of tensions between the two countries.
The bill, which was submitted to the Senate Finance Committee on Monday, would effectively block dozens of Chinese companies that have been sanctioned by the U.S. government for security concerns over suspected ties to the Chinese military from participating in U.S. equity and capital markets.
The proposal follows bipartisan legislation filed by Rubio last year, which would have banned foreign issuers of stocks in U.S. markets from using a foreign public accounting firm. That bill remains in the House after it was referred to the Committee on Financial Services.
“The Chinese Communist Party’s exploitation of U.S. capital markets is a clear and ongoing risk to U.S. economic and national security that must be addressed,” said Rubio, a Republican who represents Florida.
“Currently, there are a number of Chinese companies operating in U.S. capital markets that are actively engaged in the Communist Party’s military, espionage, human rights abuses, ‘Military-Civil Fusion Strategy,’ and the 'Made in China 2025’ industrial policies.”
Rubio’s bill would apply to companies that were officially banned from exporting goods to the U.S. Since May, the U.S. Department of Commerce has added 46 Chinese companies to its blacklist for suspected ties to Chinese military projects. Some of the firms were sanctioned for their alleged roles in perpetrating human rights violations against ethnic Muslim minorities in the country.
Most recently, the department added 24 Chinese companies to the list in August, alleging that they helped the Chinese government build artificial islands in the South China Sea, which the U.S. saw as a “provocative” military maneuver. The additions include construction, telecommunications and digital technology companies.
The bill would also target 24 Chinese companies the department flagged in May for their suspected ties to the country’s nuclear arms program, including CloudMinds, an artificial intelligence startup with offices in Beijing and Irvine, California.
If passed, the bill would give the companies a one-year grace period before they are banned from trading securities on U.S. exchanges.
The proposal follows a record number of technology firms publicly issuing stocks in the U.S. for the first time, many of them led by Chinese firms, as investors flee growing uncertainties from a resurgent COVID-19 pandemic and a contentious election cycle.
The move comes as equity markets continue to surge. U.S. initial public offering activities have picked back up since June after the initial market turmoils of the pandemic, hitting 87 new technology stocks in September, the market’s highest number of IPOs in almost two decades, according to Ernst & Young.
In its second-quarter report, the accounting giant noted that cross-border IPO levels have remained steady in most markets despite headwinds from COVID-19, led by China.
Out of 24 cross-border IPOs in the first half of 2020, 15 originated from the Greater China region, seeking a total of $2.3 billion. As of June 30, there were 14 Chinese IPOs listed on U.S. exchanges and one on the London Main Market, E&Y wrote.
Chinese firms were the first to return to their pre-pandemic IPO activity since the outbreak earlier this year, but may face further volatility from trade disputes between China and the U.S., E&Y warned.
“On the flip side, potential changes to U.S. listing regulations for Chinese companies may increase IPO activity on both Mainland China and Hong Kong stock exchanges,” E&Y analysts explained, adding that they’re already seeing signs of increased dual listings by Chinese companies.
For example, China’s Alibaba-backed fintech Ant Group revealed in July that it would hold its IPOs in Hong Kong and Shanghai amid escalating tensions with the U.S. over trade disputes and civil rights protests in Hong Kong. The listings value the company at around $280 billion.
Earlier this month, the U.S. State Department warned the financial industry that any company that does business with a list of 10 sanctioned Chinese and Hong Kong officials will face sanctions themselves, including restrictions on borrowing from U.S. lenders.
--Additional reporting by Tom Auchterlonie, Theo Wayt