Washington Weekly: China Investment Restrictions

The House passed three bills relating to US treatment of Hong Kong for trade, investment and customs purposes (see below). The House also passed a resolution to condemn the administration's decision to withdraw US troops from northern Syria (see below) and a bill to require the SEC to conduct investor testing. The Senate approved various judicial nominations.

The House will vote on legislation to modernize the existing Bank Secrecy Act (BSA) regulatory regime for combatting money laundering and to establish a new federal registry for corporate beneficial ownership as well as a bill to combat foreign interference in elections. The Senatemay vote on fiscal year 2020 government funding bills.

More Buyback Blowback.

A House Financial Services subcommittee used a hearing this week to hone attacks on share buybacks. While there is scant evidence that share buybacks divert capital from more productive purposes, a frequent refrain from some Democrats is that buybacks benefit executives and "rich" investors at the expense of wage increases and capital reinvestment. The hearing was animated by several legislative proposals that would seriously restrict companies’ abilities to engage in buybacks. These proposals won’t go anywhere in a Republican-controlled Senate. Likewise, major regulatory action also is unlikely. At another recent Financial Services Committee hearing, SEC Chairman Jay Clayton indicated that while the SEC will ensure that there is no market manipulation on buybacks, he did not think it was the Commission’s role to judge the appropriateness of company decisions on capital allocation. While there will continue to be criticism of buybacks on the campaign trail, it won’t result in any tangible action in the current Congress.

Impeachment.

Although House Speaker Nancy Pelosi (D-CA) has announced only the start of an impeachment inquiry, a vote in the House to impeach the President is nearing and appears all but inevitable. All but seven of the 234 House Democrats now appear supportive of the impeachment inquiry of the President based on the content of his July phone conversation with the president of Ukraine. The House held closed committee hearings featuring various administration witnesses this week and will hold more over the next few weeks. These hearings are designed to add muscle to the impeachment case that Democrats plan to finalize soon. Absent any major development, President Trump is on the verge of being impeached, probably sometime next month before Thanksgiving or in early December.

US-China Trade.

Last week, President Trump announced "phase one" of a trade deal with China with both US and Chinese trade negotiators participating in the announcement. This agreement is really an outline of a half-dozen or so issues on which the two sides generally have agreed. Over the next month, the two sides will flesh out the details of these areas of agreement, a process that hopefully will result in a more official announcement by Chinese President Xi and President Trump when they both are in Chile for meetings on November 16-17. This wordsmithing process inevitably will lead to squabbling that the media will characterize as a threat to the tentative agreement. There will be speedbumps as one or both sides jockey to add new provisions to the agreement. Nonetheless, we expect an agreement to emerge when the two leaders meet next month. Both sides need the mini-deal to take some pressure off their economies and certain constituencies, but this deal – which sidesteps most of the serious issues dividing the countries – actually lessens the likelihood of a more comprehensive deal. We don't expect a bigger deal to materialize before the US elections in November of next year. Indeed, a phase one agreement may be all that is ever completed.

Hong Kong Bill Moves.

The House passed a trio of bills aimed at showing US support for the Hong Kong protest movement. The legislation requires the US to reassess the special trade and investment status it has with Hong Kong on an annual basis. The bills encountered no opposition in the House. Identical legislation has been introduced in the Senate and will likely be considered this year. This is a tricky issue for President Trump in light of his ongoing negotiations with China on trade. He may oppose the bill if he believes it interferes with the trade negotiations. More likely, he will ask the Senate to delay its consideration of the bill until after his expected meeting with President Xi in mid-November. Either way, this bill, which could exacerbate the US-China relationship, is on a path to passage.

China Investment Restrictions.

As Congress was out on recess the past two weeks, we received many questions about reports that the Trump administration was considering steps to limit US portfolio investments into China, including the delisting of Chinese companies on US exchanges and limits on government pension funds’ Chinese investments. The administration has been considering these steps in the context of finding negotiating leverage in the ongoing trade fight. While there are concerns about the failure of Chinese companies to comply with US auditing requirements, there also are concerns from some in the administration about whether delistings are an appropriate response to remedy this issue given their potentially significant negative impact on US capital markets. In addition to potential actions by the administration, there is related legislation in Congress. While that legislation has bipartisan support (as does anything taking a tough line on China these days), these particular bills have not been vetted and are unlikely to advance. Meanwhile, whether and how the administration acts in this area will depend to a large extent on the ebb and flow of tensions in the US-China trade talks.

Sanctions on Turkey.

President Trump managed to unite Democrats and Republicans in opposition to his decision to withdraw US troops from Syria. Despite the announcement yesterday of a temporary cease-fire in northern Syria, there is significant pressure on the US to act on already-authorized sanctions against Turkey and to enact new ones. The House will likely act first on this issue and advance a sanctions package this month against various defense and other government officials in Turkey and certain financial institutions that are linked to Turkey's military. The Senate will move more deliberately (as always) and act in accordance with developments on the ground in Syria (i.e. it will move faster if Turkey's offensive resumes). If President Trump vetoes a final bill, there will likely be enough bipartisan support in both the House and Senate to override the veto. The President's withdrawal decision unleashed nothing short of a fury in the Middle East, and developments there are very fluid. The tension between the US and Turkey (a NATO ally, which the US is required by treaty to help defend militarily if attacked) has been building for some time and is very serious. Regardless of what happens on the ground in northeastern Syria, the US-Turkey relationship has fundamentally changed for the worse. It's hard to imagine it getting better anytime soon, and this standoff will be a major US foreign policy challenge for many years.

Supreme Court Case Impact.

If the Supreme Court had to choose the cases it considers based on their ability to impact US politics, they chose wisely for this year. In their current term, the court will consider cases involving gay and transgender rights in the workplace, a potential end to the Deferred Action for Childhood Arrivals program (relating to the legal status of younger immigrants), restrictions on abortion providers in two states, various environmental cases and a Second Amendment challenge to gun restrictions in New York. The court's decisions on this wide array of hot button social policy issues could excite crucial voting blocs that will drive turnout in next November's elections and potentially determine its winners.

Green Energy.

House Democrats are preparing a package of tax incentives to promote "Green Energy." The bill is still evolving but will likely include tax benefits to purchase electric cars and production credits for wind and solar power, among numerous other provisions. This proposal may seem like a nonstarter with the Republican Senate and President Trump; however, many of these provisions have received bipartisan support over the years. This package has a fair chance of becoming law if both sides engage in a serious negotiation. Republicans would like some fixes to the 2017 tax law but are concerned that those changes may come at too high of a price to pay for what Democrats want in return. Negotiations will heat up next month and Democrats are setting the table for that conversation now by putting forward these tax incentives for green energy.

One Year Out. 

With the Democratic nomination still months from being determined,Election Day 2020 may seem a long way off, but early voting for the general election likely will begin in many states in less than a year. Exact dates have not been announced for each state's early voting plans, but about 15 states are expected to begin the early voting process in the first half of October 2020. This means that there will only be three months between the official selection of the Democratic nominee at the convention in July and the first ballots of the 2020 election being cast. With the proliferation of early voting in most states, Election Day will not be the voting day of choice for many voters and should be considered the last possible day to vote instead of the official day to vote.