The White House is discussing ways to restrict US capital flows into China in what would be an unprecedented move that could limit trillions of dollars in investment and accelerate a financial decoupling of the two largest economies in the world. Bloomberg News first reported earlier on Friday that the restrictions Trump administration officials are looking into include delisting Chinese companies from US stock exchanges and preventing US government pension funds from investing in the Chinese market. “[We] don’t believe any of these ideas are ready for prime time at this point. Actions to limit trillions of dollars in investment are going to be met with opposition on Capitol Hill,” said Henrietta Treyz, director of economic policy research at Veda Partners, a consulting firm focusing on policy analysis in Bethesda, Maryland. “While smaller-scale federal intervention is likely, these broad-based changes are not likely to become reality in the near term,” Treyz wrote in a report on Friday following the news. So far this year, about US$65.4 billion of US investment capital flowed into Chinese equity and debt, following an inflow of about US$160.4 billion in 2018, according to the Institute of International Finance. The deliberations come as Washington and Beijing prepare to start a fresh round of trade negotiations on October 10 to resolve a 15-month trade war that has rattled the world’s two biggest economies, the global economy and investors alike. Any move to limit investments would add to the pressure already squeezing the US-China relationship. It would also counter recent goodwill gestures each side has shown the other, exempting and delaying tariffs on each other’s imports. Any capital controls would accelerate the decoupling of the countries’ financial markets, analysts warned, causing a disruption far greater than the punitive tariffs already assessed on hundreds of billions of dollars of goods. Wall Street finds silver lining in US’ security fears over China “The US has a long-standing problem with Chinese companies listed in the US – saying they are not meeting the requirements [for listing] – but there is a reason that the White House has been putting that on the back burner,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management. “One has to be aware that such a move can cause collateral damages. The question here is how not to hurt ourselves.” The push to limit Chinese access to American capital is said to have been spearheaded by White House trade adviser Peter Navarro, one of the biggest China hawks among aides to US President Donald Trump, and officials at the National Security Council. But according to Bloomberg, people involved in the process say that even more dovish advisers have rallied behind some of their suggestions. The White House declined to comment, but a US Treasury official said on Saturday that there were no current plans to stop Chinese companies from listing on US exchanges. “The administration is not contemplating blocking Chinese companies from listing shares on US stock exchanges at this time,” Treasury spokeswoman Monica Crowley said in an emailed statement. The White House has been discussing its plans of how to protect US investors against investing in Chinese companies, whose accounting statements and business practices are often opaque. The Public Company Accounting Oversight Board has indicated to various lawmakers in recent months that it is not inclined to pursue this kind of delisting action. Trump officials are also examining how the US could put limits on the Chinese companies included in stock indices managed by US firms, according to Bloomberg, although it is not clear how that would be done. Human rights bill adds to fears of US-Hong Kong ‘decoupling’ More Chinese companies in recent years have been added to major indices that a broad array of investors have access to. Hundreds of Chinese businesses have been added into the MSCI indices since last year; Bloomberg Barclays began adding Chinese bonds to its flagship Global Aggregate Bond Index in April. Senator Marco Rubio, Republican of Florida, and other US lawmakers have been advocating for stronger investment scrutiny for Chinese companies in stock indices and US pension funds. In a letter to the MSCI in June, Senator Rubio said the US “can no longer allow China’s authoritarian government to reap the rewards of American and international capital markets” while their companies avoided financial disclosure and basic transparency. American depository receipts of Alibaba, the Chinese e-commerce giant, plunged 5.8 per cent on the New York Stock Exchange following the news, while Baidu and other Chinese companies tanked Friday. Alibaba owns the South China Morning Post . Exact mechanisms for how to get approvals for the moves have not yet been worked out and any plan is subject to approval by Trump. “For what it’s worth, senior Economic and Banking Committee counsel were caught off guard by this afternoon’s reporting,” Treyz said. “White House officials do not appear to be overly focused on getting pre-emptive buy-in from lawmakers on Capitol Hill for these reforms, which is generally a helpful strategy if ever the White House intends to actually encourage legislation to make these changes legally.” There is some question also as to whether the Treasury could move unilaterally to institute these investment restrictions in Thrift Savings Plans (TSP) for US government employees. The market capitalisation of the 156 Chinese companies, including at least 11 state-owned firms, listed on the three-largest US exchanges – the Nasdaq, New York Stock Exchange and NYSE American – stood at a collective US$1.2 trillion as of late February, according to a report by the US-China Economic and Security Review Commission. China earlier this month removed a US$300 billion cap on overseas purchases of Chinese stocks and bonds, meaning global funds no longer need to apply to purchase quotas to buy the assets. The move is designed to lure more foreign capital into Chinese markets. China confirms ‘considerable’ US soybean and pork purchases ahead of talks Roger Robinson, president and CEO of RWR Advisory Group who has been working on the issue since the 90s, said this type of pressure can make a difference. “Treating the unequal financial dimensions and undisclosed material risks associated with China’s presence in the US capital markets will likely represent the next big phase in the bilateral economic relationship,” he said. One of the most extreme arguments for cutting China off from American capital – advanced by Navarro and outside advisers like Steve Bannon – is that US investments in Chinese companies or on China’s exchanges mean that Americans are unwittingly giving financial support to the Chinese Communist Party and a rising strategic and economic rival. Trump would also have the support of hardline advocates, like Bannon, his former chief strategist, and hedge fund manager Kyle Bass. Both are leading the Committee on the Present Danger: China. It is a group that advocates for total economic decoupling as a way to secure America’s national security. In a recent “threat briefing” – which is how the group titles its meetings – Bannon said American financing has helped spur China’s economic ambitions and technological advances. “The Frankenstein monster that we have to destroy is created by the West. It’s created by our capital,” Bannon said at the September 12 briefing. While some administration officials see these steps as giving the US more leverage in the trade negotiations, others are working hard to ensure the two are kept separate. At the same time, the administration is hesitant to move forward on this out of fear that the already fragile economic relationship between Beijing and Washington could collapse. US seeing China as a threat hinders relations, says Foreign Minister Wang Yi In particular, officials at the Treasury Department and the National Economic Council are wary of how any action could spook investors and are trying to signal to relevant stakeholders that the rule of law can be trusted. Those officials would want to frame any move as taking action against known bad actors that have persistently been out of compliance with US laws. The NEC is still working on an analysis of the potential impact of any moves targeting financial flows. Just when that might be completed is unclear. Nathan Sheets, former Treasury undersecretary for international affairs, said action to delist Chinese companies or direct American dollars away from certain firms would be “a big deal” for markets and the bilateral relationship. “Both of those would be very disruptive. On the order of a kind of Huawei announcement,” he added, referring to the Trump administration’s blacklisting of China’s biggest telecommunications-equipment manufacturer. Rubio, who sponsored the so-called Equitable Act, is the biggest champion of such efforts on the Hill and his public comments largely mirror what the White House is discussing. “Although we didn’t coordinate with the White House on today’s announcement, the effort is very much consistent with what Senator Rubio has been pushing for,” a Rubio spokesman told the South China Morning Post . The senator applauded the White House’s work on the issue. “This administration deserves credit for their efforts to deal with the threat that the Chinese government and Communist Party poses to US national and economic security, including how Beijing takes advantage of its access to US capital markets for predatory purposes,” Rubio said in a statement.