American investors face a significant blind spot that merits urgent attention. Hidden within the financial statements of major publicly traded companies lies a vulnerability that neither regulators nor markets adequately address: substantial corporate assets and revenue streams located in international territory, with limited ability to repatriate funds during a crisis and scant transparency about the risks to investors whose retirement funds and portfolios depend on them.
The issue centers on a fundamental accounting treatment that obscures a critical vulnerability. When examining a corporate balance sheet, cash held in New York banks appears identical to cash held in Beijing. Manufacturing equipment in Michigan receives the same accounting treatment as factories in Shenzhen. While this standardized approach works during stable periods, it creates concerning gaps in risk disclosure as geopolitical tensions increase and the possibility of economic conflict over Taiwan grows---particularly when companies may find themselves unable to extract their assets and earnings from Chinese territory.
Mitigating this risk requires enhanced disclosure that distinguishes between freely accessible assets and those subject to capital controls, potentially applying appropriate discount rates that reflect the true accessibility risk of foreign-held assets.
The Scale of Hidden Exposure
The scale is staggering. According to Apollo Asset Management, roughly 7% of annual revenue earned by S&P 500 companies originates in China, approximately $1.2 trillion in revenue from Chinese customers. This revenue exposure is significant because it represents economic activity that generates profits, cash, and assets within Chinese territory—funds that become subject to China's capital control regime and could be restricted from repatriation during crises, unlike simple trade transactions. For context, this revenue is about four times the size of the bilateral trade deficit, a primary focus of ongoing trade negotiations between the U.S. and China.1,2
This revenue exposure represents more than just lost sales in a crisis scenario, it highlights the vulnerability of American companies to Chinese capital controls that could prevent the repatriation of profits, cash reserves, and other liquid assets. U.S. corporations hold significant assets within Chinese borders, such as cash reserves, manufacturing facilities, intellectual property, and joint venture stakes. All appear on balance sheets without distinction from domestic holdings, yet existing under the jurisdiction of a government that requires permission for capital outflows and increasingly uses economic measures as tools of statecraft.
While sophisticated institutional investors and investment bank analysts may understand these risks conceptually, three critical gaps remain: First, they lack quantified exposure data to properly model crisis scenarios. Knowing Apple sells 43 million iPhones in China differs vastly from knowing how much cash, inventory, and receivables could be trapped there. Second, retail investors and pension funds relying on published financial statements remain largely uninformed about these accessibility risks. Third, financial regulators and banks need this granular data to develop meaningful stress test scenarios that accurately reflect real-world capital control risks, rather than the current generic treatments that bundle China with other developing markets.
China's Capital Control Environment
Consider the current economic environment and China's approach to capital controls. China's debt-to-GDP ratio has risen to 288%---more than double America's 125%. Its financial system shows signs of stress, with major real estate developers like Evergrande have collapsed, shadow banking institutions have failed, and Beijing has responded with market interventions including restrictions on stock sales by major shareholders and stringent capital outflow controls.3,4 These actions demonstrate the kind of government decisions that creates uncertainty for foreign assets and the ability of multinational companies to access their Chinese-generated wealth during periods of tension.
Recent changes to China's State Secrets Law provide Beijing with expanded legal authority to regulate multinational companies, while the broad definition of "work secrets" gives Chinese authorities significant discretion over business operations.5 Foreign companies already experience increased scrutiny under enhanced security reviews, including unannounced inspections and questioning of personnel. More concerning, China's existing capital control framework requires government approval for significant outflows of foreign currency, creating a mechanism that could effectively strand corporate assets during periods of tension.
The McDonald's Precedent
When Russia invaded Ukraine in February 2022, McDonald's was forced to exit the Russian market after more than 30 years of operations. The company faced a non-cash charge of approximately $1.2-1.4 billion to write off its net investment in the market and recognize significant foreign currency translation losses, while losing $50-55 million per month in sales during the closure process.6 Unlike Russia, however, China represents a vastly larger economic relationship with American companies, with major brands maintaining substantial operations: McDonald's operates 6,820 outlets across China, Walmart runs 364 stores, and Apple sold 43 million iPhones to Chinese buyers in 2024 alone.7 The McDonald's precedent illustrates what happens when geopolitical events force rapid corporate exits from hostile territories.
Accounting Framework Failures
The current accounting framework fails to capture these capital control vulnerabilities. A technology company's cash holdings in Chinese banks receives identical balance sheet treatment to funds housed in American financial institutions, despite vastly different accessibility during a crisis. A manufacturer's profits generated in China appear the same as comparable earnings from Ohio operations, even though repatriating those Chinese profits requires government permission that could be denied or delayed indefinitely during time of financial crisis or geopolitical tension.
Capital controls represent a unique disclosure issue because they directly contradict the fundamental assumption underlying financial statements: that reported assets are accessible to the reporting entity. When a company reports $1 billion in Chinese cash reserves on its balance sheet, it presents this as an accessible asset, but capital controls may render that cash effectively inaccessible during crises. This isn't about expanding risk disclosures to cover hypothetical future scenarios, rather it's about correcting a current misstatement of fact regarding asset accessibility. Other geopolitical risks like supply chain disruptions or mineral access restrictions, while serious, don't fundamentally misrepresent the nature of assets already on the balance sheet in the same way capital control exposure does.
This vulnerability isn't theoretical, it occurs during ordinary economic stress, not just geopolitical crises. In March 2023, as China managed post-pandemic economic pressures, billionaire investor Mark Mobius experienced capital control restrictions that prevented him from accessing his funds, warning other investors: "I have an account with HSBC in Shanghai. I can't get my money out. The government is restricting the flow of money out of the country... I would be very, very careful about investing in an economy under a tight government grip."8
The implications extend beyond individual companies to systemic risks in the financial sector. Banks making loans secured by foreign assets or extending credit based on global revenue streams may inadvertently concentrate their exposure to capital control risks. Should these assets become inaccessible or revenue streams disrupted during a crisis, the resulting losses could affect lending institutions and potentially impact the broader U.S. financial system.
Regulatory Gaps
The regulatory and accounting approach to these risks has been insufficient. While the SEC has made progress holding Chinese companies accountable through the Holding Foreign Companies Accountable Act — passed after Chinese coffee chain Luckin Coffee fabricated $310 million in sales and was delisted from NASDAQ — this legislation requires Chinese companies to allow U.S. auditors to inspect their books or face delisting.9,10 However, this addresses only Chinese companies hiding risks from American investors, not the mirror problem: American companies with undisclosed exposure to Chinese capital control risks that could strand assets and earnings.
Even major accounting firms now acknowledge these vulnerabilities. Deloitte's recent guidance advises companies to reassess their foreign exposures given current geopolitical environments, while PwC has published specific guidance on how geopolitical conflicts impact financial statements.11 Yet despite this professional recognition of the risks, no comprehensive accounting framework exists to address capital control vulnerabilities systematically.
Current Federal Reserve stress tests only briefly mention geopolitical risk and group China into a general "developing Asia bloc" rather than analyzing it as the strategic competitor it has become.12 Meanwhile, SEC disclosure requirements focus on general risk factor discussions and currency translation issues, but do not mandate separate presentation of assets by accessibility risk or revenue streams by repatriation vulnerability.
The regulatory authority for addressing these gaps is distributed but clear: the SEC has mandate over disclosure requirements, the Financial Accounting Standards Board (FASB) sets accounting standards, the Federal Reserve conducts stress testing, and Congress can provide legislative backing if needed. Each agency operates within existing investor protection frameworks that already require disclosure of material risks, and capital control exposure clearly falls within this mandate.
The Path Forward
What investors need is accounting that reflects economic reality rather than simplified uniformity. Companies should be required to identify and separately disclose assets held in jurisdictions where capital control restrictions exist. Balance sheets should distinguish between assets and revenue streams that can be freely accessed during crises and those subject to foreign government discretion over capital outflows. Additionally, consideration should be given to applying appropriate discount rates to assets held in countries that regularly use capital controls as policy tools, reflecting their reduced accessibility and liquidity during periods of tension. Such discount mechanisms may need to be dynamic, potentially fluctuating based on current geopolitical tension levels and the assessed probability of capital control restrictions being implemented or tightened.
The path forward involves enhanced disclosure requirements that compel companies to reveal both the scale of their Chinese asset exposure and their vulnerability to capital control restrictions. Risk assessments should quantify the potential impact of various scenarios---from temporary capital controls to complete asset inaccessibility---on corporate cash flows and balance sheets. Financial regulators should examine systemic implications by including capital control scenarios in bank stress tests and requiring institutions to assess their exposure to companies dependent on potentially inaccessible foreign revenue streams.
Critics may argue that markets efficiently price these risks and that additional disclosure burdens drive companies overseas. However, if markets were efficiently pricing capital control risk, we wouldn't see such large exposures continuing to build during escalating tensions. The Mobius example demonstrates that even sophisticated investors can be caught off-guard by routine capital control enforcement.
Implementation would likely cause temporary market volatility as investors repriced companies with significant Chinese exposure, but this represents a correction toward accurate valuations rather than artificial losses. The alternative of waiting for a crisis to reveal hidden exposures would cause far greater disruption. Compliance costs would be minimal compared to existing reporting requirements, involving primarily enhanced footnote disclosures and risk factor updates that companies should already be conducting internally.
This framework should initially focus on China given the scale and immediacy of risk, but could extend to other jurisdictions with restrictive capital control regimes. The goal is not to discourage international business but to ensure both institutional and retail investors understand what they're purchasing. Implementation could be phased over 12-18 months, allowing companies to develop necessary reporting systems while providing markets time to adjust.
American investors deserve accounting standards that provide complete information about material risks, including the accessibility of corporate assets and the vulnerability of revenue streams to capital control restrictions. They require regulatory protection that include truthful and complete information about investments, including geopolitical and capital control risks before crises develop, not afterward.
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Will Kirkman is the Director of Decision Advantage at Two Six Technologies, specializing in strategic competition and national security policy. His work supports the U.S. Government through interagency programs and decision support capabilities focused on economic statecraft, critical technologies, and coordinated competitive actions.
"Apollo: Beyond Tariffs, U.S. Companies Are Deeply Tied to China's Consumer Market." Seeking Alpha, December 2024. https://seekingalpha.com/news/4443062-apollo-beyond-tariffs-u-s-companies-are-deeply-tied-to-china-s-consumer-market↩︎
CNBC: Bessent sees trade deal likely with China before November deadline on reciprocal tariffs”, September 2025: https://www.cnbc.com/2025/09/16/bessent-sees-trade-deal-likely-with-china-before-november-deadline-on-reciprocal-tariffs.html↩︎
Xia, Yining and Han Wei. "China's Debt-to-GDP Ratio Climbs to Record 287.8% in 2023." Nikkei Asia, January 30, 2024. https://asia.nikkei.com/Spotlight/Caixin/China-s-debt-to-GDP-ratio-climbs-to-record-287.8-in-2023↩︎
"China Tightens Grip on Stocks With Net Sale Ban at Open, Close." Bloomberg, February 21, 2024. https://www.bloomberg.com/news/articles/2024-02-21/china-tightens-grip-on-stocks-with-net-sale-ban-at-open-close; "Chinese Regional Regulators Curb Capital Outflows as Yuan Drops." Bloomberg, May 30, 2024. https://www.bloomberg.com/news/articles/2024-05-30/chinese-regional-regulators-curb-capital-outflows-as-yuan-drops↩︎
"China Expands Scope of 'State Secrets' Law in Security Push." The New York Times, February 28, 2024. https://www.nytimes.com/2024/02/28/world/asia/china-state-secrets-law.html↩︎
Colvin, Geoff. "Exclusive: Inside McDonald's months-long decision to sell all 853 stores in Russia." Fortune, July 27, 2022. https://fortune.com/2022/07/27/mcdonalds-closing-all-stores-russia-revenue-employees/↩︎
"Apollo: Beyond Tariffs, U.S. Companies Are Deeply Tied to China's Consumer Market." Seeking Alpha, December 2024. https://seekingalpha.com/news/4443062-apollo-beyond-tariffs-u-s-companies-are-deeply-tied-to-china-s-consumer-market↩︎
Billionaire investor Mark Mobius says he cannot take money out of China -FOX Business." Nasdaq, March 5, 2023. https://www.nasdaq.com/articles/billionaire-investor-mark-mobius-says-he-cannot-take-money-out-of-china-fox-business↩︎
U.S. Securities and Exchange Commission. "Luckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting Fraud Charges." U.S. Securities and Exchange Commission, 16 Dec. 2020, www.sec.gov/newsroom/press-releases/2020-319.↩︎
Bu, Qingxiu. "The anatomy of Holding Foreign Companies Accountable Act (HFCAA): a panacea or a double-edge sword?." Capital Markets Law Journal 16.4 (2021): 503-527.↩︎
Deloitte. "Accounting and Financial Reporting in Uncertain Times: Considerations for Navigating Macroeconomic and Geopolitical Challenges." Financial Reporting Alert, September 15, 2023. https://dart.deloitte.com/USDART/home/publications/deloitte/financial-reporting-alerts/2023/considerations-for-navigating-macroeconomic-and-geopolitical-challenges;
PwC. "Accounting Implications of Geopolitical Conflicts." 2024. https://viewpoint.pwc.com/dt/gx/en/pwc/in_depths/in_depths_INT/in_depths_INT/accounting-implications-of/7-cash.html↩︎
Board of Governors of the Federal Reserve System. "2025 Stress Test Scenarios." February 2025. https://www.federalreserve.gov/publications/files/2025-stress-test-scenarios-20250205.pdf↩︎