Investment in Chinese Companies Explodes as an Issue; BlackRock on the Spot

Donald Trump/PHOTO: Gage Skidmore via Creative Commons

President Trump said this morning in a Fox Business interview with Maria Bartiromo that he is “looking at” the question of Chinese companies listed on American exchanges. His comment came a day after National Legal and Policy Center asked the CEO of BlackRock, the world’s largest asset manager, to divest its customers’ holdings in 137 Chinese companies listed on American stock exchanges.

Earlier this week, agencies of the United States government took a similar step. The Federal Retirement Thrift Investment Board, which manages retirement savings for government employees and military, announced that it would freeze its plan to invest in Chinese stocks this year. The decision came at the urging of officials in the Trump administration and from members of Congress, who do not want to see the communist nation rewarded with American investments following its mishandling and cover-up of the release and spread of the Wuhan virus.

In 2017 the FRTIB made plans, following its investment consultant’s advice, to redirect $54.3 billion in one of the employees’ funds to a new index, 8 percent of which consisted of Chinese companies. According to the New York Times, “the board…had for months defended its plans to increase its exposure to China, saying that it was simply seeking to diversify its investments and provide better returns for its savers.”

That decision turned this week following two letters to from administration officials: The first, from National Security Adviser Robert O’Brien and National Economic Council Chairman Larry Kudlow, went to U.S. Labor Secretary Eugene Scalia on Monday, notifying him that President Trump did not want the fund invested in Chinese firms. Subsequently, the same day, Scalia shared the O’Brien/Kudlow letter and informed FRTIB Chairman Michael Kennedy of the President’s directive to undo plans to move investments based on the new index.

“The board is to immediately halt all steps associated with investing the…fund…,” Scalia wrote, “…and to reverse its decision to invest Plan assets on the basis of that international equities index. This is now the only acceptable course….”

Besides the obvious COVID concerns and human rights abuses, Scalia said lack of transparency in disclosures about Chinese companies made them a risky investment. Also, some of the companies on the index equip the Chinese military, and are also involved in surveillance technology, which calls into question national security.

“The question was whether we were going to put our military men and women, and other federal workers, in a position where if they wanted to invest in international markets, they were going to have to invest in Chinese companies,” Scalia told Fox Business on Tuesday.

He said the retirement plan was the largest in the world, and that about 1.3 million veterans participate in it.

Last month a Northeastern University business school professor of strategic management, Joseph Giglio, explained in an op-ed in the Quincy Patriot-Ledger that in one example, a Chinese aviation company in the index is the sole supplier of military aircraft to the People’s Liberation Army.

“Federal employee money is being used to support an adversary,” he wrote, “undermining the country’s national security and fueling China’s economic growth.”

China was on some Congress members’ investment hit list well before COVID came along. Last year, Republican Sen. Marco Rubio of Florida and Democrat Sen. Jeanne Shaheen of New Hampshire urged the FRTIB to reverse its decision. The two senators also led a group of lawmakers in introducing the bicameral Taxpayers and Savers Protection (TSP) Act, which would prevent the FRTIB from steering federal retirement savings to China.

“This is absolutely the right call,” Shaheen said in a joint press release with Rubio on Wednesday. “It’s reckless to prop up companies that threaten U.S. interests and values, and it would be particularly egregious to do so with the hard-earned savings of federal workers, including our military and civilian workforce.”

The legislative initiatives don’t stop with government employees’ pensions. On Tuesday, Republican Sen. Rick Scott of Florida sent a letter to U.S. stock exchanges, major pension plans and underwriters urging them to review their policies and discontinue coordination with U.S.-listed Chinese-based companies. This followed a letter he had sent in February to Jay Clayton, Chairman of the Securities and Exchange Commission, to express concern “about how U.S.-listed Chinese companies present regulatory, oversight and enforcement challenges that undermine transparency and confidence in American markets.”

“I urge you to review your policies and discontinue selling, purchasing, or underwriting U.S. listed Chinese-based companies stock for the protection of your investors and American capital markets,” Scott wrote to the investment managers this week. “We can no longer allow Communist China to get away with flouting our laws, defrauding our citizens and harming American investments.”

Scott’s missive parallels a letter sent earlier this week by National Legal and Policy Center President Peter Flaherty to BlackRock CEO Larry Fink. 

“American retail investors have been repeatedly burned when U.S.-listed Chinese firms have been taken private at lower valuations and relisted on foreign exchanges,” Flaherty wrote. “Would not your customers — and our nation — be better served by investing in non-Chinese companies in regulated and transparent markets?”

It is not known whether Fink was one of the recipients of Scott’s letter, but the news of FRTIB’s action and the senators’ involvement certainly are on his radar, and now NLPC has challenged him directly.

Failure to act would not be a good look for Fink or BlackRock.