Deterring Chinese Communist Party influence in publicly traded companies

Imagine being required to have a Democratic Party Committee, a Republican Party Committee, or even a Communist Party Committee embedded at a company where you work. Imagine further that such a committee is situated at the senior managerial level and either the committee or its members are vested with decision-making input or authority over company matters.

Implausible, you may say dismissively, an Orwellian fantasy that exists only in fiction writing.  If only.

News broke in late July that British global bank HSBC became the first foreign financial services company to establish a Chinese Communist Party (“CCP”) Committee inside its investment banking business. HSBC Qianhai Securities, an investment banking subsidiary of HSBC, established the committee reportedly after HSBC’s majority ownership of its subsidiary increased from 51 percent to 90 percent.

China’s Company Law, enacted in 1993, requires companies, at Article 19, to establish a CCP Committee “to carry out the activities of the Party,” and further requires companies to “provide the necessary conditions for the Party organizations to carry out their activities.” This requirement has been followed in state-owned enterprises for years. However, enforcement in purely private sector companies, let alone voluntary establishment of a CCP Committee in a foreign financial services company, has either been nearly nonexistent or not publicly reported.  Until now.

Outsiders can only speculate about HSBC’s reasons to establish a CCP Committee. Perhaps creating a CCP Committee was a Chinese government condition for approving HSBC increasing its majority ownership stake in its subsidiary. No doubt lawyers would have cited complying with China’s Company Law as a pretext for what amounts to state-sponsored legal blackmail.

Like many moves the CCP has made under President Xi Jinping, this one is intended to increase Chinese government influence over and control of businesses beyond state-owned enterprises. Embedding CCP Committees in private sector companies is part of a broader strategic initiative to achieve economic dominance and replace the rules and market-based capitalist system with a command-and-control centralized quasi-socialist system designed to benefit the Chinese Communist Party first and others merely secondarily.

The establishment of a CCP Committee (under duress or not, as the case may be) by one of the world’s larger financial services companies is only one of the latest developments that should prompt a broader reconsideration of how the United States should respond to this and other efforts by China to engage in malign influence operations targeting the private sector.

Pending a broader strategic review, a tactical response is waiting for Congress when it returns to session later in September: the proposed No Chinese Communist SURPRISE Parties Act, introduced in the Senate in February with an identical companion bill in the House. It would target one of the specific problems presented by the HSBC revelations: concealed CCP infiltration of publicly traded companies owned by and ultimately accountable to shareholders.

The bill proposes that the SEC implement three new disclosure requirements for companies that, like HSBC, trade on U.S. exchanges: (1) disclose whether the company or any subsidiary or joint venture partner had or has a CCP Committee or equivalent organization; (2) if a CCP Committee or equivalent organization participates or has participated in the company’s operations, disclose and describe the participation; and (3) disclose whether the company’s directors have conflicting fiduciary duties.

The bill is a rare instance of straightforward legislation designed to address a pernicious problem in a minimally burdensome manner for the government to implement and companies to comply with while still achieving its purposes. What’s more, it also presents a rare instance where diverse political and private party interests align, sometimes in counterintuitive ways.

Democrats could support the bill because it advances national security interests through improved corporate governance, oversight, and accountability. ESG as an investment analysis concept has unfortunately become tarnished by partisans from both parties, but the “G” stands for good governance, and the bill’s disclosure requirements would be good governance improvements that might be particularly appealing to some on the left.

Republicans could support the bill because it advances national security interests through minimal government regulation while enhancing affected companies’ competitiveness. How does more SEC oversight enhance competitiveness? Disclosure requirements can help prevent the occurrence of that which otherwise must be disclosed — the bill gives U.S. exchange-listed companies legal cover they could use to resist CCP infiltration efforts and avoid the corrosive effect CCP Committee activity would have on business performance. No U.S. exchange-listed company wants to invite shareholder class action lawsuits alleging complicity with communists.

Finally, business and trade associations, shareholders (institutional, activists, and otherwise), and human rights groups could support the bill because it advances national security interests founded on an implicit but critically important norm to all: the Chinese Communist Party should have no influence whatsoever in the operations and decisions of private sector companies.

Consider a company with an embedded CCP Committee requiring use of state-owned enterprise subcontractors charging a higher price or delivering substandard quality relative to a private sector competitor; or demanding allocation of company revenue to party-building activities contrary to the best interests of shareholders; or preventing supply chain diversification out of Xinxiang where Chinese persecution of Uyghurs is most prevalent.

These scenarios are all too real if HSBC’s decision to establish a CCP Committee becomes the norm rather than the outlier.

Passing the “No Chinese Communist SURPRISE Parties Act” this session followed by a swift White House signature would be a meaningful step toward deterring CCP malign influence efforts targeting the private sector and would be the type of good October surprise rarely experienced during an election season.

Christopher J. Hunter served as a federal prosecutor in the U.S. Department of Justice, criminal division, fraud section and in the U.S. Attorney’s Office for the Southern District of Florida. He also served as a Special Agent with the FBI. He currently works at IWP Family Office, a privately owned family office services company. Views are his own.