Strategic competition with China has become the central challenge for American security policy. For the United States, the key to long-term success is the dynamism of its economy and the growth that it enables. American capital markets, in particular, are an extraordinary advantage. The commitment to investor choice against a backdrop of transparency, disclosure, and accountability creates the conditions for optimal allocation of capital and supports U.S. economic primacy over the long term. Yet the traditional materiality-based disclosure regime—the set of laws and regulations ensuring that public companies share with investors the information necessary to make informed investment decisions—is not well suited for the realities of U.S.–China competition.

One of the key underpinnings of increased corporate and investor exposure to China was the assumption that more closely integrating the American and Chinese economies would transform China into a society governed by predictable rules that investors can properly underwrite. This gamble has clearly failed. The U.S. economy is now massively exposed to the coercive power of the Chinese Communist Party (CCP), and American investors and managers lack the information necessary to make careful judgments. We need a new approach to address this vulnerability.

For investors, companies’ current supply-chain disclosures are generally inadequate for assessing how friction in the Washington–Beijing economic relationship may affect the disclosers’ businesses. For example, Apple’s most recent Form 10-K (a required annual summary of a company’s financial performance) includes mention only of a generic risk factor that Apple’s business can be disrupted by international disputes. Neither Apple’s Form 10-K nor its voluntary supply-chain disclosure provide any meaningful data on the exposure of its Asian supply chain to basic measures like tariffs and export controls likely to be a long-term feature of the U.S.–China relationship, to say nothing of direct actions that the CCP might take to interfere with its business.

Current supply-chain disclosure practices are largely the result of advocacy by human rights organizations, which focused on labor conditions in the developing world. Disclosures thus fit the needs of these organizations, not those of financial investors. Nike’s extensive supply-chain reporting, for example, gives detailed information about individual factories, allowing human rights groups to assess labor practices. But such reporting doesn’t provide adequate information for investors to assess the financial consequences of strategic competition.

Investors could theoretically punish issuers for leaving out information on emerging China risk, but U.S. corporations’ massive sunk costs in the China market do not create a favorable backdrop for such pressure. A stronger nudge from Washington, D.C., is needed.

Former Securities and Exchange Commission (SEC) chair Jay Clayton has proposed a limited pilot program that would require large U.S. public companies to disclose the extent of their exposure to China and the potential impact of an adverse change to the Chinese economic relationship. This approach is a promising start, but its requirements must be detailed and prescriptive to ensure that the new disclosures offer useful information to investors.

The limitations of the bipartisan Holding Foreign Companies Accountable Act of 2020 are instructive. The HFCAA was intended to address disclosure deficiencies with respect to Chinese companies listed in the U.S. and included requirements designed to help investors better understand the degree of CCP influence on issuers. But the bar was set at such a high level as to be essentially useless, requiring disclosure only in the event of direct ownership by the government or CCP members on the board of directors. Thus, Alibaba’s 2023 Form 20-F dutifully reports only de minimis state-owned enterprise ownership of certain joint ventures and the names of associated board members of such ventures, despite extensive evidence of the CCP’s influence on the company.

Congress should expand the HFCAA approach to cover not just Chinese firms listed in the United States but also U.S. companies with significant exposure to the Chinese market. This extension is critically important in economic terms, as American companies have a total market capitalization of over $40 trillion, compared with approximately $1 trillion for U.S.-listed Chinese companies. With respect to direct exposure to the CCP, the requirements should be much broader than those of the HFCAA, to include disclosure of any significant relationship (commercial or otherwise) with the CCP, the People’s Liberation Army, or any other instrument of the Chinese security state.

Data regarding issuers’ economic exposure to the Chinese market are just as important as exposures to the CCP and must be a focus of enhanced reporting. Issuers should also be required to share data concerning the revenues and costs attributable to the Chinese market, and to identify the Chinese companies with which they do significant business. This would give greater transparency and comparability to investors, while avoiding the traps of other prescriptive steps like the SEC’s proposed climate rules, which seek to mandate disclosures that are not financially material to investor judgments about the issuer.

Export controls, sanctions, and tariffs are vital to the overall approach toward China, but U.S. economic statecraft should also focus on leveraging capital markets, given their role in shaping economic behavior. The vast majority of international commerce is conducted by private actors making judgments about the expected value of a particular action; those judgments can be influenced by corporate disclosures. The United States should seek to arm investors with the information they need to make better risk-adjusted decisions regarding exposure to China. Doing so will support the efficient allocation of capital, strengthening the U.S. economy and the United States’ competitive position.

Photo: Dilok Klaisataporn/iStock


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