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1 1 (April 5, 2021)

handle is hein.crs/govecxj0001 and id is 1 raw text is: Congressional Research Service April 5, 2021 U.S. Capital Markets and China: Issues for Congress Financial ties between the United States and China have expanded significantly over the past few years. The government of the People's Republic of China (PRC or China) has created limited openings in China's debt and equity markets, while China's firms have sought access to U.S. capital, debt, and private equity markets. The Rhodium Group estimates that, as of December 2020, U.S. investors held $100 billion of Chinese debt and $1.1 trillion in Chinese equities, while Chinese investors held $1.4 trillion in U.S. debt and $720 billion in U.S. equities. Many U.S. investors see growth opportunities in Chinese stocks and other financial investments. Some Members in Congress have raised concerns, however, that U.S. investments may fund certain Chinese firms and activities that are tied to the state and efforts to advance China's industrial, military and other goals. Congress passed the Holding Foreign Companies Accountable Act (P.L. 116-222) to address its concerns about the lack of compliance by PRC firms with the U.S. Security and Exchange Commission's (SEC) statutory audit requirements. Chinese firms appear to use complex structures that may obscure risks, state ties, and other corporate details, complicating the effectiveness of U.S. government oversight and U.S. investors' legal recourse. China's Presence on U.S. Exchanges U.S. exchanges offer China's firms access to deep capital markets and paths to earn hard currency, build brand recognition, and expand overseas. There were 217 Chinese companies listed on the three major U.S. stock exchanges as of November 2020, up from 200 in December 2019. Some Chinese firms have delisted since 2019, but initial public offerings (IPOs) have been popular for Chinese firms in emerging industries, such as electric vehicles. China's chipmaker Semiconductor Manufacturing International Corporation (SMIC) delisted from the New York Stock Exchange (NYSE) in 2019, but continued to trade on U.S. over-the-counter markets until February 2021, when trading stopped in response to former President Trump's Executive Order 13959 (see below). PRC firms raised an estimated $12 to $19 billion on U.S. exchanges in 2020. As of October 2020, Chinese firms listed on U.S. stock exchanges accounted for a total market capitalization of $2.2 trillion, according to the U.S.-China Economic and Security Review Commission. In many instances, the stocks and core assets of parent Chinese firms are not listed on U.S. exchanges. Many firms use American Depositary Receipts (ADRs), a structure that allows a U.S. financial institution to sponsor a secondary U.S. exchange listing of a foreign company. The overseas parent firm's stocks are listed in the United States through a contractual arrangement that bundles the company's stock certificates. Most listings of China's large state-owned firms (SOEs) are ADRs. These ADRs include a small number of the shares that SOEs list in China, and the China-listed shares represent only a small portion of the overall firm, potentially shielding the parent and its assets from the exercise of shareholder rights and financial or litigation risk. The U.S. legal entity for Chinese SOEs is often a shell company with few assets of its own. Even when a U.S. entity is directed and controlled by an SOE parent, it has proven difficult (but not impossible) to legally establish connectivity. In U.S. litigation since 2014, the Aviation Industry Corporation of China (AVIC) has tried to deny direct ties to its U.S. affiliates and twice tried to assert immunity under the Foreign Sovereign Immunities Act (P.L. 94-583) to thwart commercial litigation despite China's World Trade Organization accession commitment that its state firms would operate on a commercial basis. AVIC's actions put the evidence burden on the U.S. party to show how the China parent is tied to its U.S. affiliates and why PRC state firms should not have immunity in commercial deals. The opacity of China's system can make it hard to secure evidence, prolong litigation, and impose significant costs on U.S. investors asserting their rights. Figure I. Outline of the VIE Structure - Oi-It 0wneds c-itM Fn.s --- 'C'rcta A g nrsr OUTSDECHINA MNSOE ChMVA--- Source: CRS with information from multiple sources. CRS estimates that two-thirds of all Chinese firms listed in the United States-including Alibaba, Baidu, and Tencent-use a variable interest entity (VIE) structure, often to address China's investment restrictions. A VIE structure involves the owners of a Chinese firm creating an offshore holding company to which foreign investors can purchase an equity claim. The holding company is tied to the parent through a series of contracts and revenue sharing agreements that mimic ownership arrangements but do not provide the same rights typically afforded to investors in U.S.-listed firms. The contracts underpinning the VIE allow the Chinese owner(s) to move funds across the business while creating a firewall between the listed entity and the core assets and licenses held by the Chinese ittps://crsreports.congress.gov

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