Sanctions Experts Tell Congress Chinese Investment Restrictions Should Be More Specific

Sectoral-based sanctions, such as those enforced by the U.S. Department of Commerce, can be vague and harder for the industry to understand than specific blocks on individuals and companies.

Restrictions on investments in and exports to China should be increased, according to testimony during a U.S. House Committee on Financial Services subcommittee hearing Tuesday.

The Subcommittee on National Security, Illicit Finance, and International Financial Institutions heard from witnesses who advocated for greater restrictions and argued that restriction should focus more on specific entities, rather than on entire economic sectors.

Thomas Feddo, the founder of the Rubicon Advisors and a former assistant secretary of the treasury for investment security, said sectoral restrictions—those that focus on a particular technology or industry—are “slow and resource intensive,” whereas a focus on blocking specific entities from the U.S. financial system is “immediate and very efficient.”

Feddo explained that an entity-based approach is easier for the private sector to understand and comply with. Representative Andy Barr, R-Kentucky, concurred and argued that sectoral restrictions create an “ambiguous yellow light” for industry, instead of a clearer, binary choice that can be achieved with an entity-based approach.

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Barr is the sponsor of the Chinese Military and Surveillance Company Sanctions Act, which would empower the president to “impose property-blocking sanctions” on individuals or companies in the military or surveillance industries “if the sanctions will address threats related to those sectors.” The bill was passed by the House Committee on Financial Services in September.

Emily Kilcrease, a senior fellow and director of the energy, economic and security program for the Center for a New American Security, argued that while it is important to restrict China’s access to “frontier” artificial intelligence and other technologies with potential military applications, “we can’t just say AI, we need to be specific with what we’re talking about,” because a lack of specificity will make sanctions policy difficult to enforce and comply with.

The American Securities Association, which has been strongly supportive of export controls related to China, wrote a letter to the subcommittee applauding its efforts: “The ASA appreciates the ongoing work of executive agencies and Congress—including members of this Committee—to further restrict the flow of U.S. capital to the [Chinese Communist Party.]”

The letter highlighted the recent decision of the Federal Retirement Thrift Investment Board to work to ensure the indexes on which its passive investment offerings are based exclude companies in China and Hong Kong.

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As markets rallied during November and December, so did the funded status of the 100 largest U.S. public pension funds, which ended 2023 at their highest point of the year at 78.2%.

According to consulting firm Milliman, the market rebound helped spur a combined $349 billion increase in funding. The aggregate funded level of the plans, as tracked by Milliman’s Public Pension Funding Index, rose to that 78.2% figure from 75.9% at the end of November and 72.4% at the end of October.

“The late-year rally pushed nine more plans above 90% funding so that 21 plans stood above this key benchmark as of December 31—a big jump from the 12 we saw as of October 31, 2023,” Becky Sielman, co-author of Milliman’s PPFI, said in a release. “On the other end of the spectrum, 11 plans moved above 60% funding, leaving only 15 of the 100 plans below this level, compared with 26 at the end of October, a good sign for the overall health of public pensions.”

The plans earned estimated investment returns of 5.2% and 3.3% in November and December, respectively, with returns for individual plans ranging from 2.5% to 7.7% in November and 1.7% to 5.0% in December. The total asset value of the plans increased to $4.857 trillion as of the end of December from $4.704 trillion at the end of November and $4.480 trillion at the end of October.

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The market value of the plans increased by approximately $233 billion during November, offset by $9 billion in net negative cash flow, and by approximately $162 billion during December, again offset by $9 billion in net negative cash flow.

The total pension liability grew to an estimated $6.213 trillion as of the end of 2023, up from $6.199 trillion at the end of November and $6.185 trillion at the end of October.

Milliman also projected how aggregate funded status will fare in 2024 under three scenarios. A baseline scenario assumes each plan’s future investment returns will equal its current reported interest rate assumption, with a median rate of 7.0% used for the projections. While “optimistic” and “pessimistic” scenarios assume each plan’s investment returns will be either 7% higher or lower than its interest rate assumption.

Under the baseline scenario, Milliman projects the aggregate funded ratio of the 100 plans would end 2024 at 79.5%, while under the optimistic and pessimistic scenarios, it projects the funded level to end the year at 84.8% or 74.2%, respectively.