In 2021, hedge fund manager Ray Dalio gave a forthright defense of his investments in China despite its horrifying human rights record and adversarial posture toward the United States. “I can’t be an expert in those types of things … I look to whatever the rules are. If the government has a policy that I should do a certain thing and so on, but I can’t be an expert in all of those particular dynamics.” This frank statement underscores the reality that financial markets allocate capital in pursuit of the highest return, regardless of whether this aligns with national values or interests. American investors and corporations are pouring hundreds of billions of dollars into China, strengthening its economy and military, and granting the Chinese Communist Party enormous leverage. The recipients of this capital tend to operate outside of American securities law and transparency requirements, corrupting the American market and subjecting retail investors and pension funds to excessive risk. Many firms in China are already under U.S. sanctions as national security threats or for human rights abuses yet are still included in American index funds.

The United States should use broad and clear prohibitions to halt the flow of American capital to Chinese firms. Chinese-domiciled or -controlled firms should be banned from U.S. stock markets and excluded from indices that allocate passive investments. Banks should be prohibited from making loans to Chinese firms. Investment firms, pension funds, and endowments should be prohibited from holding Chinese assets. Existing assets should be divested within five years.