China Using U.S. Investor and Consumer Funds for Its Military

The People’s Republic of China is modernizing its military for a potential conflict with the United States, with Xi Jinping aiming for readiness by 2027—though a slowing economy may delay this goal.

Despite these tensions, China continues to benefit from U.S. capital markets, with significant funding for the People’s Liberation Army (PLA) coming from American investors and consumers, effectively putting U.S. money to work against its own interests.

Since 2012, U.S.-China financial ties expanded significantly but have contracted since 2020 due to China’s economic slowdown, increased capital controls, and heightened U.S. government scrutiny of investments in China.

Much of this slowdown can be directly attributed to President Trump’s U.S.-China trade war, which significantly curtailed China’s access to U.S. funds.

During his first term, President Trump recognized the China threat and imposed numerous restrictions to decrease China’s access to U.S. capital.

His administration banned U.S. investments in Chinese firms linked to the military and intelligence sectors through Executive Order 13959 and pushed for the delisting of Chinese companies that failed to comply with U.S. audit requirements under the Holding Foreign Companies Accountable Act.

The expansion of the Committee on Foreign Investment in the United States (CFIUS) blocked Chinese acquisitions of U.S. firms in sensitive sectors, such as technology and infrastructure.

Trump also implemented Section 301 tariffs on over $360 billion worth of Chinese goods, reducing their competitiveness in U.S. markets. Export controls targeted critical technologies, while the federal retirement fund was barred from investing in Chinese firms.

As of December 2023, U.S. investors held $322 billion in Chinese long-term securities (a 13.4% decline from 2022), while China’s holdings of U.S. securities grew 4.5% to $1.87 trillion.

U.S. net portfolio investment flows into China dropped sharply, with over $30 billion in net outflows in 2023—the first net outflow since 2018. Investments by U.S. private equity funds in China plummeted from $140 billion in 2019 to just $4 billion in 2023.

Congress is now debating measures to regulate financial flows, including enhanced disclosure and audit requirements and restrictions on U.S. investments in Chinese state-owned enterprises, military-linked firms, and strategic sectors.

The trend is going in the right direction, with China having less access to US funds, but more needs to be done.

The trend is moving in the right direction, with China gaining less access to U.S. funds. However, much work remains, as U.S. asset managers and index providers have directed $6.54 billion into 63 companies identified by the U.S. government as contributing to China’s military capabilities or supporting human rights abuses.

While these activities are not illegal, the panel has called on Congress to pass legislation restricting investments in blacklisted entities.

In December 2023, the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party released a bipartisan report titled Reset, Prevent, Build: A Strategy to Win America’s Economic Competition with the Chinese Communist Party.

Chaired by Mike Gallagher (R-WI) and co-led by Ranking Member Raja Krishnamoorthi (D-IL), the committee adopted nearly 150 policy recommendations aimed at reshaping the U.S. approach to economic and technological competition with China.

While, the Biden administration failed to accept these recommendations, it is possible that Trump will.

The report outlines three key pillars: resetting the economic relationship with the People’s Republic of China, preventing the flow of U.S. capital and technology that supports China’s military advances and human rights abuses, and building technological leadership and economic resilience in partnership with allies.

Chairman Gallagher and Ranking Member Krishnamoorthi emphasized the bipartisan commitment to these goals, stating the recommendations will “reset the terms of our relationship with the PRC, prevent the flow of American capital and technology from supporting its military advances and human rights abuses, and build collective economic resilience while ensuring American leadership for decades to come.”

The United States must urgently recalibrate its economic relationship with the People’s Republic of China (PRC) to address the systemic risks of relying on a strategic competitor that leverages state power to dominate global markets.

For over two decades, U.S. companies and the government prioritized access to China’s markets, cheap production, and investment opportunities, only to face Beijing’s failure to honor trade commitments, rampant intellectual property theft, market manipulation, and predatory subsidies aimed at eroding American competitiveness.

This strategy, paired with the PRC’s focus on critical and emerging technologies, has created dependencies that undermine U.S. economic resilience and national security.

To counter these threats, the U.S. must take three key steps.

First, reset the terms of the economic relationship by reducing reliance on PRC-controlled supply chains and leveling the playing field for U.S. companies.

Second, stem the flow of U.S. capital and technology that enables China’s military modernization, human rights abuses, and predatory technological goals.

Currently, American investments and expertise inadvertently fuel the People’s Liberation Army’s (PLA) ambitions to become a “great wall of steel.”

Finally, the U.S. must proactively invest in technological leadership and strengthen economic resilience by funding innovation, attracting global talent, and building partnerships with allies to reduce dependency on China for critical goods such as rare earth minerals, weapon components, and pharmaceuticals.

This strategy, combining defensive measures with proactive investments, aims to secure U.S. technological and economic leadership while safeguarding national security and reducing exposure to Beijing’s coercive tactics. In short, this paper outlines how Trump can put America First to counter the PRC.

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