Risk Factors: Chinese companies are exploiting American capital markets

The Chinese fast fashion giant Shein has filed to go public in the U.S., with Goldman Sachs, JP Morgan Chase and Morgan Stanley as lead underwriters. The IPO (initial public offering) is projected to raise billions of dollars. It is also colored by controversy.

Shein has faced pushback — and litigation — for everything from labor abuses to trademark infringement. It has been accused of everything from unsustainable production practices to tax evasion.

But even those controversies pale in comparison to a bigger question, and controversy, about the Shein IPO. It underscores a dangerous rift between the U.S. policy narrative in Washington, D.C., and the U.S. market reality as reflected on Wall Street and in Silicon Valley. That rift reveals the ineffectiveness of (claimed) U.S. efforts to defend against and compete with the Chinese Communist Party (CCP) and its global ambitions.

Shein’s public listing, as well as the raft of other Chinese companies pursuing the same path, make clear the toothlessness of U.S. policy toward China; Washington’s unwillingness actually to confront either the CCP or the American financial and economic players (that is, the Goldman, Chase, Morgan Stanley players poised to profit from Shein’s IPO) whose incentives have been coopted by the CCP.

In 2018, the U.S. National Defense Strategy defined China as a great power competitor. In November 2020, the Trump administration issued an executive order intended to ban investment in Chinese military companies, therefore acknowledging capital markets as a critical battlefield in the U.S.-China great power competition. The change in administration did not affect that acknowledgement. It has been one of the greatest consistencies between the Trump and Biden regimes: In August 2023, the Biden administration issued its own executive order, this one calling for restrictions on outbound U.S. investment into “countries of concern.”

But the real world impact of this policy? Minimal, at best. Between May 2022 and February 2023, amid a spike in competitive tensions and PRC efforts better to control its commercial champions, Chinese IPOs in the U.S. froze. Then, ten months ago, Hesai Group, a Chinese Lidar manufacturer, listed on the Nasdaq in the biggest U.S. IPO for a Chinese company since 2021.

After that, there are signs of a deluge. In October, a Nasdaq executive celebrated that 116 Chinese companies were in the pipeline to list on the exchange, up from 65 in June. To state the obvious: That near-doubling has overlapped perfectly with the White House’s purported efforts to limit U.S. capital support for the Chinese system.

It would be one thing if these companies listing on U.S. exchanges were benign Chinese players — market actors operating safely outside the most strategic or sensitive areas of the U.S. China competition. But they’re not. On the contrary, they risk supporting everything that the U.S. has sought most explicitly to resist about the CCP’s industrial policy, from human rights abuses to military modernization.

Shein has repeatedly been accused of relying on forced labor in the Xinjiang region, the epicenter of Beijing’s cultural genocide against the Uyghur minority. Lidar is a military-relevant technology used in everything from tanks to drones; it would be surprising if the laser sensor company Hesai did not supply the Chinese military. The same holds for Innovusion, another Chinese Lidar company that filed to list on the Nasdaq in August.

More generally, all of these companies operate at the behest of the Chinese Communist Party, a non-market player intent on controlling global commercial, tech and security ecosystems. That’s bad for America and the world. It’s also bad for investors: Remember the delisting of Didi, a Chinese ride share giant that Beijing forced to delist from the New York Stock Exchange (and move to Hong Kong) in May 2022 — in order better to control the company and its data. That delisting cost U.S. investors billions of dollars. 

What then to make of the apparent contradiction? It’s simple; U.S. policy isn’t working. For all the talk and bluster, for all the lists of bad actors, new government offices established, and guardrails put in place, Washington is failing to compete with China — to push back not only on Beijing’s human rights abuses, military modernization and coercive industrial policy, but also on the CCP’s canny, manipulative ability to fund those programs with American capital.

Enough with the fecklessness. Washington needs to follow through. Policies should have teeth. Rhetoric should be backed by action. And U.S. capital markets should be an American strength — not a Chinese one.

U.S. exchanges should not be taking on the risk of servicing investment in Chinese companies. U.S. underwriters should not be profiting from their role as Chinese puppets. Index funds investing in Chinese IPOs should not be exposing the American public to the risk of a Chinese exposure that is politically problematic, carries near certain human rights risks, and potentially costly. Regulators of American markets should not be greenlighting deals that depend on a non-market adversary.

But the greatest onus falls to Washington, which should be the source of U.S. leadership: If the White House, or Congress, is going to claim to enact a policy, that policy should have more to it than voluntary disclosure.

There’s a competition under way. it will determine American, and Americans’, prosperity and security. It’s well past time for action.

Emily de La Bruyere and Nathan Picarsic are senior fellows at the Foundation for Defense of Democracies and co-founders of Horizon Advisory