Washington DC, Wall Street must communicate on China threats
February 2028: China’s warships are conducting massive exercises off the coast of Taiwan.
Temporary housing is popping up around China’s southeastern ports.
People’s Liberation Army troops are massing near the port cities and civilian ships are being confiscated and repurposed for military use.
Our best intelligence suggests that General Secretary Xi Jinping has given the order to invade.
Already in a bear market, the S&P 500 plummets 15%. The price of gold spikes.
Liquidity evaporates across financial markets. Shipping insurance skyrockets.
Global maritime trade is thrown back to 19th-century levels.
Rumors abound that some London and Asian banks that are on the verge of failing. Americans see their pensions shrink and their bank accounts hemorrhage cash.
A desperate US president asks his Cabinet: Are there any economic and financial tools we can use to deter the looming invasion?
That’s the fictional scenario that the Select Committee on the Chinese Communist Party considered during a tabletop exercise in New York last month.
Playing the role of Cabinet advisors were current and former execs from major Wall Street banks, pharmaceutical companies and critical minerals mining companies.
In 2028, we found, we had few good non-military options to prevent an CCP invasion of Taiwan.
Worse, our economic vulnerabilities, such as critical supply-chain dependencies, undermined our military deterrent posture.
Seeing that America was dependent on China for active pharmaceutical ingredients and rare earth minerals, and on Taiwan for semiconductors, CCP General Secretary Xi Jinping concluded that he held the global economy hostage, was capable of enduring more economic pain than America, and so could thus undertake launch a risky military operation with a reasonable chance of success.
But the war game had a second act: We traveled “back” to 2023 to see what hard choices we can make now to increase our leverage in the future.
The time to start exercising isn’t while you’re having a heart attack, it’s long before.
Today, the US needs to diversify critical supply chains out of China through a mix of incentives, regulatory reform and trade policy.
Strengthening our economic sovereignty now and trading more with our allies will make economic deterrents like SWIFT system access more powerful and prevent the Chinese Communist Party from holding Americans economically hostage.
We also need to stop funding the CCP’s military modernization and intelligence-surveillance complex.
That demands restricting outbound capital flows on both public and private investment in China, including through passive indices.
But the biggest takeaway of all was that to deter conflict, there is no substitute for American hard power.
The war game was just one part of our committee’s broader trip to New York to speak with Wall Street leaders about the systemic risk posed to our economy from China.
We wanted to find out if Wall Street was moving to protect American investors from a China-sparked crisis or simply betting on another bailout.
We found an industry just waking up to a hangover.
One bank CEO called the last 25 years of our financial relationship with China “a huge mistake.” Some see the systemic risks of investing in China clearly.
In his testimony to our field hearing, former Bridgewater CEO Dave McCormick argued that “the Chinese economic model poses grave financial and geopolitical threats to the US and its interests.”
Unfortunately, many more on Wall Street continue to act like the CCP is a friend, or at least a trusted business partner.
They also continue to bury their heads in the sand on Taiwan, ignoring the view shared by nearly all intelligence and military leadership that, as Secretary of the Air Force Frank Kendall said last month, “the intelligence couldn’t be clearer. China is preparing for war … with the United States.”
Cut to the head of a major asset management firm insisting that the chance of China invading Taiwan in the next five years was “zero.”
It’s like Washington and Wall Street are two different countries speaking completely different languages.
We’ve started to see parallels with the last financial crisis: Wall Street pushes trillions of toxic securities onto unwitting Americans, using financial engineering to hide risks and skirt regulations.
Instead of subprime mortgages in 2008, this time it’s Chinese securities that often use obscure “Variable Interest Entity” structures to strip corporate governance and shareholder protections from investors.
The risks go well beyond a Taiwan Strait conflict.
The CCP is criminalizing routine business practices like due diligence, data gathering and independent corporate governance often necessary for fulfilling obligations to investors and shareholders.
Given the myriad risks, you’d think that if American pension money were going into Chinese firms, we’d have higher accounting and regulatory standards for those firms, especially when they list on our stock exchanges.
But the opposite is true.
A recent deal struck between the US government’s account watchdog, the Public Company Accounting Oversight Board, and the Chinese government circumvents the spirit of the Holding Foreign Companies Accountable Act.
The deal forces US regulators to accept Chinese audits of US-listed Chinese firms despite those audits being found inadequate.
As former head of the Securities and Exchange Commission Jay Clayton testified to our committee: Decades after China’s welcome into the global economy, “The belief that regulatory and policy norms in China would gravitate toward transparency, accountability and stability remains substantially aspirational.”
And so American pensions, endowments and retirement savings are at risk.
Fraud, fake accounting and outright lies are endemic to the communist system. In hedge-funder Jim Chanos’ words, “There is a long and storied history of data coming out of China being falsified at every level of government reporting.”
We went to Wall Street to share Congress’ bipartisan concerns regarding the CCP’s increasing aggression.
We also wanted to invite criticism, as we recognize these are complex issues.
Preserving the integrity of US capital markets and the dominance of the US dollar will take thoughtful legislation and sustained oversight.
Our trip happened to begin on 9/11, and before conducting our war game we visited Ground Zero.
The 9/11 Commission concluded that the most important failure leading to 9/11 “was one of imagination,” as the terrorist threat “ was not a major topic for policy debate among the public, the media, or in the Congress.”
Though a CCP invasion of Taiwan may still seem unfathomable to the financial community, the American people see the growing risks of CCP economic coercion and military aggression.
It is time for leaders in Washington and Wall Street to use our imaginations in order to prevent a crisis and protect our economic sovereignty.
Rep. Mike Gallagher is Chairman of the Select Committee on the Chinese Communist Party and represents Wisconsin’s 8th District.
