Millions of Americans have unknowingly invested hundreds of billions of dollars in Chinese companies whose audits have never been verified by U.S. regulators because the Chinese government does not permit its companies to submit to basic scrutiny and oversight in the United States. Hundreds of Chinese companies are listed on U.S. stock exchanges through a variety of creative investment mechanisms. Their financial audits, according to Chinese law, can’t ever be checked.

What’s worse, when a Chinese firm is revealed to be involved in fraudulent activity, as happens all the time, U.S. investors have zero recourse in China. The result: Chinese companies are bilking U.S. investors and U.S. markets are carrying huge and incalculable added risk. In 2018, a group of whistleblowers highlighted the problem in a documentary called “The China Hustle.”

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On Wednesday, Congress engaged on the issue in a big way. Sens. Marco Rubio (R-Fla.), Tom Cotton (R-Ark.),, Robert Menendez (D-N.J.) and Kirsten Gillibrand (D-N.Y.) introduced a bill that would give any foreign firm three years to make their audits available to U.S. regulators or face increased disclosure requirements. If they don’t comply, they would be delisted from U.S. exchanges.

The Chinese government is actively shielding U.S.-listed Chinese companies from complying with U.S. laws and regulations by outlawing the disclosure of financial information on national security or secrecy grounds. That places American investors at risk and damages the integrity of U.S markets, according to Rubio.

“The Communist Chinese government continues to exploit the freedom and openness of the U.S.-led global economic order to further serve its mercantilist goals, despite naive hopes that joining the [World Trade Organization] would turn it into a responsible stakeholder,” he told me.

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Reps. Michael K. Conaway (R-Tex.), Tim Ryan (D-Ohio) and Mike Gallagher (R-Wis.) introduced companion legislation in the House on Wednesday. If enacted into law, the legislation could have huge consequences for hundreds of Chinese firms currently listed on U.S. exchanges in one way or another.

The U.S.-China Economic and Security Review Commission reported as of February there were 156 Chinese companies listed on the top three U.S. exchanges, worth $1.2 trillion, including 11 Chinese state-owned firms.

The Public Company Accounting Oversight Board, a U.S. regulatory agency, keeps a public list of foreign firms whose audits and financial disclosures they have not been able to verify. There are about 250 companies on the current list, almost all from China or Hong Kong. A Morgan Stanley Research analysis I obtained on Rubio’s bill identifies more than 800 Chinese companies that could be affected.

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Of course, the Chinese government could agree to allow Chinese companies to cooperate with U.S. laws and regulations. Years of bilateral negotiations on this issue broke down in the last administration. This issue could also be included in the U.S.-China trade negotiations ongoing now, although there’s no public sign that’s happening.

The bottom line is that tolerance for Chinese abuse of American institutions in Washington is disappearing fast. Calls for holding China and Chinese companies to basic laws and standards are coming from both parties. If Beijing won’t negotiate, congressional calls for action will only get louder.

“Americans deserve full transparency about the companies listed on our stock exchanges,” Gillibrand said in a statement. “If China refuses to comply with international norms of transparency, then its companies should not have access to the U.S. market.”

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The risk to ordinary Americans is escalating as institutional investors steadily increase their holdings of Chinese assets, exposing millions of people unwittingly though things such as pension funds. In February, global index provider MSCI announced it would quadruple its holdings of Chinese assets from 5 to 20 percent in one of its key index projects. That could hand China an additional $80 billion of Americans’ money without ensuring that it is subject to basic transparency and accountability.

The problem has been allowed to fester so long because Wall Street firms, accountants and the exchanges themselves profit while helping Chinese firms raise funds in U.S. markets, said Paul Gillis, professor at Peking University’s Guanghua School of Management. “There are many in the U.S. investment community who are invested in keeping these listings going,” he said. “Finally somebody’s dealing with this anomaly that foreign companies listed in the United States are subject to lower standards than American companies are, which is patently unfair.”

There’s no telling if or when this legislation will become law and the defenders of Wall Street and China in Washington are going to want their say on the issue. But the opening salvo against Chinese exploitation of U.S. capital markets has now been launched. It will be a long and escalating battle to keep U.S. markets secure and investors safe from Chinese abuse.

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