In a move aimed at addressing strategic, commercial, and national security concerns posed by China, bipartisan representatives of the US Congress’s certified public accountant caucus have introduced a bill titled the No China in Index Funds Act. The legislation seeks to prohibit funds from investing in Chinese companies, citing the unique difficulties in evaluating these companies, particularly within the context of index funds.
The bill, spearheaded by Brad Sherman, co-author and ranking member of the capital markets subcommittee, highlights the inherent risks associated with including Chinese stocks in index funds, which typically adopt a passive investment strategy without conducting thorough research into individual companies. Sherman emphasized the need to keep Chinese stocks out of index funds due to the lack of research into the risks they pose.
Role of SEC in No China in Index Funds Act
The proposed legislation, while not detailing specific steps for implementation, empowers the US Securities and Exchange Commission (SEC) to issue necessary rules to enforce the restrictions. Penalties for violations could include fines of up to $250,000 or double the amount of the transaction underlying the violation.
This bill is part of a broader effort by Sherman and Victoria Spartz, a Republican congresswoman from Indiana, who have unveiled three additional legislative measures aimed at addressing various aspects of US-China economic relations. These measures include ending tax breaks for Chinese equities, restricting sanctioned Chinese companies’ access to US capital markets, increasing transparency on risks to American corporations, and reducing exposure to these risks for retail investors and retirement savers.
No Capital Gains Allowance for American Adversaries Act
The “No Capital Gains Allowance for American Adversaries Act” is a proposed bill aimed at changing the tax treatment of investments in companies based in certain countries considered adversaries of the United States. If passed, this bill would eliminate the capital gains tax break currently available for investments in companies located in China, Russia, Belarus, Iran, and North Korea.
Additionally, the bill seeks to eliminate another tax break known as the “step-up in basis” at death for investments in these companies. This means that when an investor passes away and their investments are transferred to heirs, the cost basis of these investments would not be adjusted to their current market value, potentially resulting in higher taxes for the heirs.
The Securities and Exchange Commission (SEC) would also require disclosure that no tax breaks are available for investments in companies based in these countries, providing transparency to investors.
Representatives Lloyd Doggett (D-TX) and Bill Foster (D-IL) are among the original cosponsors of this legislation, indicating bipartisan support for the bill. If enacted, this legislation would impact investors who hold investments in companies based in these countries, potentially leading to higher taxes on their investment gains.
Spartz, drawing on her experience as a former Big Four auditor, highlighted the importance of transparency and proper auditing of Chinese operations to protect American investors and financial markets from risks posed by foreign adversaries like China.
The No China in Index Funds Act adds to a growing number of legislative proposals aimed at curbing US private investments in China, reflecting broader concerns about China’s economic practices and its implications for US national security. These proposals include measures such as the Disclosing Investments in Foreign Adversaries Act of 2023, which seeks to increase transparency by requiring private funds to annually disclose assets invested in China to the SEC.
With scrutiny intensifying on various sectors and entities involved in US-China economic relations, the proposed legislation underscores the increasingly complex dynamics shaping bilateral ties and efforts to safeguard American interests in the face of evolving geopolitical challenges.
