Senator, Analysts Warn US Investors in ‘CCP-Run’ Companies

Senator, Analysts Warn US Investors in ‘CCP-Run’ Companies
This aerial photo taken on October 18, 2023 shows buildings of China's developer Country Garden Holdings in Suqian, in China's eastern Jiangsu province. (Photo by AFP) / China OUT (Photo by STR/AFP via Getty Images)
Indrajit Basu

In the wake of Country Garden’s dollar debt default and its adverse effect on investors, Sen. Rick Scott (R-Fla.) wants the Securities and Exchange Commission’s (SEC) Chair to investigate China’s opaque financial environment and hold Chinese Communist Party-run companies accountable for mitigating risks to America’s investors, families, its economy, and its national security.

Mr. Scott has also urged both government agencies and private companies to separate their operations and assets “from the genocidal Communist Chinese regime.”

In a letter to the SEC’s Gary Gensler on Nov. 9, Mr. Scott wrote: “Country Garden is currently Communist China’s largest private developer, making this situation very concerning and especially alarming because of the continued access of American capital flow that goes into Communist China.”

“The Chinese Communist Party (CCP) greatly benefits from American capital—notably raised consistently through access to dollar-denominated bonds, while providing the public and investors little to no financial data to validate its domestic economic claims,” he added.

The “unfettered flow of American capital,” according to Mr. Scott, not only poses a threat to both the economy and national security, but U.S. investments in China are in jeopardy due to the country’s deteriorating economy and the CCP’s refusal to improve financial sector transparency.

Since the 2021 collapse of Evergrande, China’s second largest property developer, confidence in China’s real estate market has been plummeting. When Country Garden announced in August that it was having liquidity challenges, the developer became the new face of China’s worsening property crisis.

The company disclosed on Oct. 10 that it had been unable to make a bond payment of HK$470 million ($60 million), and while American shareholders have been worried about firm dollar bonds defaulting, Citigroup International Ltd. on Oct. 25 declared the company as a defaulter on a dollar-denominated bond for the first time.

The builder, one of the world’s most indebted developers, failed to pay $15.4 million in bond interest by the end of a 30-day grace period after missing the initial Sept. 17 deadline.

Investors Lost Billions

“As Country Garden misses payments and the CCP’s property market continues to deteriorate, we must ensure American investors are protected from these reckless and opaque companies who are artificially propped up by the CCP and pose significant threats to U.S. investors and retirees,” Mr. Scott said in his letter.

The CCP has destroyed billions of dollars’ worth of U.S. investor wealth in recent months as an indirect impact of its crackdown on its own companies.

This year, for example, the Chinese regime increased its regulatory crackdown on companies and strengthened its control over the economy, resulting in the detention, disappearance, or investigation of more than a dozen top executives from industries such as technology, finance, and real estate.

The crackdown was motivated by the CCP’s desire for control and its increasing concerns about national security, with it continuing despite the Chinese economy being on shaky ground, with private investment plummeting since June.

While it is difficult to estimate how much U.S. investor wealth the CCP has destroyed, reports suggest that the crackdown on Chinese tech companies alone has resulted in a selloff that has erased about $1.5 trillion from Chinese stocks and dented the portfolios of some of the world’s biggest names in finance.

According to a recent CNBC report, at least 115 mutual funds in the federal government’s Thrift Savings Plan include one or more of the 30 sanctioned or watch-listed Chinese enterprises. That also poses a threat to national security, according to experts.
Additionally, both Sen. Bob Casey (D-Pa.) and Mr. Scott estimate that U.S. private investment firms have invested over $80 billion in China between 2018 and 2022.

Structural Concerns

Mr. Scott’s concerns aside, the debate over investing in China has switched profoundly to China’s long-term structural problems including debt and deflation, according to analysts.

“[The Year] 2023 marked a year of challenges for China both cyclically and structurally with rising concerns on debt, deflation and demographics,” said Morgan Stanley in a Monday client note viewed by The Epoch Times.

“The unprecedented real deflationary risk, and the concerns over China’s long-term growth outlook, have led to global investors reducing their active China exposure for six consecutive months since April 2023 and hitting a lower exposure level versus October 2022,” the note added.

For U.S. investors, the longer-term forecast for China’s economy is even more worrisome.

A Goldman Sachs’s private note on China’s economic forecasts released on Monday and viewed by The Epoch Times show real GDP growth slowing to 4.8 percent in 2024, extending the decelerating growth path in the post-pandemic era.

“By 2030, our economists see China growth settling at around 3 percent, translating into an average annual growth rate of 4 percent in the remainder of this decade,” the note said.

Defending US Capital

Mr. Scott contends that the CCP is reaping the benefits of increased U.S. investment in its markets but is not disclosing adequate financial statistics to back up its assertions about the health of the domestic economy.

“It’s time that we protect American capital by ensuring that there is financial clarity regarding U.S. investments made within Communist China,” the senator wrote.

He has also proposed the Protecting American Capital Act to address investment sanctions loopholes, protect investors from shady Chinese companies, and identify vulnerabilities for safer transactions.

The purpose of this bipartisan bill, the senator wrote, is to urge the Treasury to keep detailed records of all U.S. investments in China, including those that go through tax havens like the Cayman Islands.