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Rep. Luetkemeyer and Rep. Torres Introduce Fortifying U.S. Markets from Chinese Military Aggression Act

Bipartisan legislation, introduced today by Congressman Blaine Luetkemeyer (R-MO) and Congressman Ritchie Torres (D-NY), would establish an advisory committee under the Financial Stability Oversight Council to develop an economic plan to mitigate the catastrophic economic fallout from potential Chinese military aggression towards Taiwan. The advisory committee, whose members would include key federal financial regulatory agencies, capital market participants, and policy makers would be tasked with identifying areas of risk to the financial markets and banking system and developing solutions to deal with their impact.

“America is unprepared for the catastrophic economic impact of a Chinese invasion of Taiwan.  Most Americans would be shocked at how quickly the fallout from a Chinese invasion of an island more than 7,000 miles from Wall Street would trickle down to America’s main streets,” said Congressman Blaine Luetkemeyer. “Our capital markets are resilient and have weathered prior military conflicts, recessions, and a global pandemic. Yet a Chinese invasion of Taiwan and the immediate economic sanctions and likely military actions that follow would present a drastically more intense challenge given how deeply our counties’ economies are integrated. We must plan accordingly.”

“It is imperative for the U.S. government to be prepared for any and all global emergencies. We must find and maintain a fair and equal strategic competition with the CCP. However, their actions towards Taiwan are threatening to the peace and stability in the Taiwan Strait. If the CCP takes the drastic action of advancing on Taiwan, we must proactively prepare our national economy,” said Congressman Ritchie Torres (NY-15). “I am pleased to join colleague Congressman Luetkemeyer in introducing the Fortifying U.S. Markets from Chinese Military Aggression, which would create a framework for capital market, intergovernmental, and interagency collaboration to effectively safeguard our economy from resulting sanctions from any future conflict between the CCP and Taiwan.”

Details of the Fortifying U.S. Markets from Chinese Military Aggression Act:

  • The Financial Stability Oversight Council shall establish an Advisory Committee to analyze, study and report on the market implications and vulnerabilities related to Chinese military aggression toward Taiwan. 
  • The goal of the Advisory Committee is to open lines of communication between policy makers, government agencies and capital markets constituents to prepare for a potential response and to mitigate economic strain and market volatility related to Chinese aggression in Taiwan.
  • The Advisory Committee shall be composed of 12 members, including various capital markets participants (market makers, asset managers, exchanges, and institutional investors), market regulators (SEC and CFTC), and experts on geopolitical risk related to China. The chair of the Advisory Committee shall be a market maker. 
  • The Advisory Committee shall meet in person two times per year with additional meetings at the call of the chair. 
  • The Advisory Committee will develop recommendations and supporting analysis, which it will present to FSOC in a public meeting. However, any portions of such recommendations and analysis that implicate national security concerns may be presented to FSOC in a close session.
  • Based on the feedback and work of the Advisory Committee FSOC shall produce an annual report detailing the following: 
    • Market vulnerabilities related to Chinese aggression in Taiwan, including, but not limited to the following: 
      • The safety and soundness of the United States banking and financial systems.
      • Market impact and potential losses faced by United States and global markets. 
      • The capacity of our markets to deal with extreme volatility that could result from aggression, i.e., trading halts, circuit breakers and other tools for managing liquidity. 
      • The impact on Chinese and Taiwanese listings in the United States. 
      • The likelihood, and potential impact of, China reducing, or eliminating its holding in U.S. Treasuries. 
      • Estimated total costs to the United States economy from Chinese military aggression toward Taiwan.
    • Recommendations and action items for regulators to make our capital markets more resilient against market shocks, volatility, and dislocation, including but not limited to the following: 
      • U.S. government coordination and response
      • Ideas for government action to limit the market impacts of a blockade and/or invasion of Taiwan.
      • Potential retaliatory actions by China and our potential response. 
      • Collaboration and testing of trade halt rules and circuit breakers across markets.
      • Avenues for further regulator engagement with capital markets participants on the topic.

Background: Analysis from global financial firm GTS has estimated a short-term stock market plummet of up to 34% after an invasion, as uncertainty about the U.S. response may lead institutional investors and retail investors to quickly exit their equity positions while market makers struggle to accurately price stocks in this volatile environment.

This short-term crash would only preview likely long-term market devastation.  Bloomberg estimates that a military engagement over Taiwan would cost roughly $10 trillion and reduce global GDP by 10%. This drop would be almost twice what was observed in the aftermath of the global financial crisis and Covid pandemic, events which triggered peak to trough declines of 57% and 35% in the S&P 500.

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