China Select Committee Chair Calls for Sweeping Outbound Investment Rules

The Biden administration’s upcoming outbound investment screening rules should restrict both private and public investments, starting with “five to six priority sectors” but eventually expanding to more, said Rep. Mike Gallagher of Wisconsin, the top Republican on the House Select Committee on China. Gallagher said the rules should stop Americans from investing in Chinese entities connected to the country’s military, human rights abuses or “technological rise,” should require Chinese companies to meet the same due diligence standards as U.S. firms, and shouldn't be adjudicated through a case-by-case process, which would cause uncertainty for American investors.

The Biden administration has been working for months on an outbound investment program, which Treasury Secretary Janet Yellen said will first be issued as a proposed rule to solicit public feedback (see 2307170029). Congress has introduced similar restrictions but has yet to pass legislation (see 2305090046), although the Senate last month approved an amendment to its version of the 2024 defense spending bill that would establish a notification regime for, but not restrict, certain outbound investments (see 2307280052).

"As Congress debates competing approaches” for outbound investment restrictions, Gallagher said, the administration should “take meaningful first steps towards effective and balanced outbound investment rules in the interim.”

Gallagher, in an Aug. 3 letter to the White House, said the U.S. needs a “full accounting of total U.S. risk exposure and the final beneficiaries of U.S. investment in” China, adding that the government’s lack of data on outbound investments “endangers our national security, is antithetical to our market system, and undercuts U.S. investors’ ability to make informed decisions.” Although exact figures are “unknown,” he said one estimate shows more than $200 billion of private U.S. capital and $1.1 trillion of public capital is invested in Chinese companies and markets.

He said the rules should restrict both sets of investments, including venture capital and private equity funding as well as U.S. holdings of Chinese stocks and bonds and trading of investment funds that include Chinese companies. Public investments in particular "represent the majority of U.S. capital flows to the [People’s Republic of China],” Gallagher said. “Any rules that exempt them will fail to address the bulk of the national security threat.”

The U.S. should restrict any investments in sectors “relevant to national security,” Gallagher said, and at first should target a handful of the critical and emerging technologies identified by the White House’s Office of Science and Technology Policy in February 2022 (see 2202090016). That list includes advanced semiconductors, artificial intelligence and quantum computing, industries that Treasury Department officials have already singled out for potential restrictions (see 2305310075).

Gallagher said any follow-on outbound investment rules “could include the remaining sectors on that list as well as those prioritized by the PRC.” The restrictions would ensure the U.S. doesn’t support China’s military “buildup, facilitate the [Chinese Communist Party's] human rights abuses or techno-totalitarian surveillance system, or deepen our dependency on the PRC in critical supply chains.”

He also said any outbound investment rules “should safeguard shareholder rights” by holding Chinese companies to “comparable due diligence standards as U.S. companies.” The new regime also should look to give American investors “certainty and predictability,” including by avoiding an “onerous new case-by-case screening process that would be unwieldy, impractical, and unnecessarily burdensome on the U.S. private sector.” He said the rules should include a “clear but expedited regulatory ‘runway’” that will “enable investors to adapt and comply.”

Gallagher also stressed the importance of coordinating the restrictions with allies. While the U.S. “should lead the formulation and implementation of an outbound approach,” he said, “allies and partners should be closely consulted in advance and persuaded to follow suit with their own parallel restrictions on investment into PRC companies.” The EU said it plans to release an outbound investment proposal before the end of the year (see 2306200052 and 2306260056).

The White House didn’t comment.