Mutual Fund Investments in Chinese Firms Targeted in New US Bill

(Bloomberg) -- US mutual funds wouldn’t be able to invest in some products that track Chinese stock indexes under a new bill in Congress.

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The measure, which still faces major hurdles to becoming law, is among the most aggressive salvos yet by American lawmakers targeting investments in China. It’s one of several introduced on Wednesday by Victoria Spartz, an Indiana Republican, and Brad Sherman, a California Democrat, that go after companies from countries the pair says undermine US interests.

The legislation would prevent Americans from “being misled regarding the value of an underlying Chinese company,” according to a statement from the lawmakers.

The legislation targets mutual funds that invest in indexes tracking primarily Chinese stocks, rather than those investing in indexes that only include some Chinese companies, according to Sherman’s office. However, the lawmakers left it to the Securities and Exchange Commission to write rules that’d ultimately determine which products are impacted.

In a deeply divided US Congress, Democrats and Republicans have advanced an measures to increase scrutiny on how Chinese companies keep their books. A 2020 law, which was sponsored by Sherman, threatened to de-list Chinese companies from US stock exchanges unless they allowed American inspections of their financial audits.

Another of the bills introduced by Sherman and Spartz on Wednesday would force US publicly traded companies to quantify and disclose to investors the role that China plays in their supply chains. A different measure would remove a US capital gains tax break for investments in companies based in China, Belarus, Iran, North Korea and Russia.

Sherman is the highest Democrat on the Capital Markets Subcommittee of the House Financial Services Committee. However, to become a law, the bills would have to clear a full committee, be passed by the entire Republican-led House and clear the Democratic-led Senate. Biden would then need to sign them into law.

--With assistance from Silla Brush and Elena Popina.

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