In Washington, bipartisan agreement is rare, but when it comes to tightening the reins on Chinese investment, both sides of the aisle are surprisingly aligned. Unlike the usual noise around tariffs or trade tensions, this time, it’s financial regulation - where policy shifts are redefining how capital moves between the US and China.
For asset managers and compliance teams, it’s a development that demands close attention. Because while the headlines may come and go, these regulatory changes are reshaping how, and where, capital flows.
Portfolio managers navigating today’s geopolitical and economic crosscurrents are watching this closely, as these changes could reshape the backdrop for cross-border flows. But interestingly, the US stock market hasn’t reacted much - shrugging off Trump’s trade wars and escalating tensions in the Middle East with a surprising dose of resilience. US equities are steady, almost disconnected from geopolitical risk, while whispers of a shift to Asia or Europe remain just that: whispers.
So what’s really going on behind the scenes in the regulatory space? Here are three key US regulatory interventions working to limit Chinese influence, with a bipartisan thumbs-up.
1. Reverse CFIUS: The US is turning the tables
You’ve probably heard of CFIUS, the Committee on Foreign Investment in the United States, which vets inbound foreign investments to protect national security. What’s newer and less well-known is ‘Reverse CFIUS’, a bipartisan initiative aimed at controlling US capital flowing out to China, Hong Kong, and Macau.
This applies to “US Persons” - which generally means US citizens, permanent residents, and entities organised in the US, including investment funds and companies. The Biden administration launched it, and the Trump administration gave it a nod this February with a National Security Presidential Memorandum.
This regulation focuses on US investments in “sensitive” tech sectors: semiconductors, AI, quantum computing, biotech, and aerospace - the backbone of future tech dominance.
Sounds straightforward, right? Not quite. Here’s the twist:
- Even investing in a company using AI, say, an e-commerce firm, could fall under scrutiny.
- Publicly traded stocks are generally exempt, except when a US investor gains certain rights that go beyond a typical minority shareholder - and there’s no magic number here. Even a stake below 3% might trigger a notification to the Treasury.
In practice, every investment manager needs a sharp eye on the nuances, checking every new position against this complex regulatory web to see if it’s reportable.
2. Sanctions: Targeting Chinese firms with military links
The US government has increasingly targeted Chinese firms with alleged ties to military or surveillance activities via sanctions and investment bans, starting with Executive Order 13959 and its successors.
These companies land on the Non-SDN Chinese Military-Industrial Complex List, off-limits to US persons. The fallout? US funds have been forced to divest, and index providers like MSCI and FTSE Russell have dropped blacklisted giants like China Mobile and China Telecom from benchmarks.
For compliance teams, it’s a moving target. Sanctions lists can expand overnight, so constant vigilance is mandatory to avoid holding prohibited securities and triggering regulatory alarms.
3. Foreign Private Issuers (FPIs): Closing the loophole
Here’s where regulatory arbitrage meets market integrity. Many Chinese companies listed in US markets aren’t incorporated in China but in places like the Cayman Islands. This allows them to sidestep the full rigors of US regulation as “Foreign Private Issuers.”
The SEC is moving to tighten the definition of FPIs to ensure these companies don’t get a regulatory free pass while competing with fully domestic firms. As SEC Chairman Paul Atkins put it, the goal is “ensuring that domestic companies are not competitively disadvantaged with respect to regulatory requirements.” This change has bipartisan backing - SEC Chairman Paul Atkins and Democratic Commissioner Crenshaw alike agree it’s about fairness and market transparency.
The message? If you want to tap into US capital markets, you need to play by US rules.
What’s the bottom line for Investment Managers and Compliance?
The bipartisan drive to regulate US capital flows to China reflects a broader shift in how geopolitics and finance intertwine. For investors and compliance professionals alike, the landscape is becoming more complex - and the stakes higher. Staying ahead means:
- Proactively monitoring exposures to Chinese companies, including those incorporated outside China but subject to US rules.
- Keeping sanction and restricted lists up-to-date to avoid significant financial penalties and reputational damage.
- Adapting to new regulatory requirements that may expand or tighten over time, especially around sensitive technologies.
The US-China financial relationship is entering a new phase defined by complex, evolving regulations. It’s a long game and the rules of play are still being written. Success will depend on how well firms anticipate regulatory shifts and embed compliance into their investment decisions. Staying compliant and agile isn’t optional; it’s essential.
If you weren’t able to join us live, Navigating What’s Next: Key Regulatory Developments is now available to watch on demand. Catch up here.
