The American public was outraged this week when the Chinese government severely punished the Houston Rockets and the National Basketball Association over one pro-Hong Kong tweet. The NBA was caught between its financial incentives and the American values that underpin its reputation, namely defending free speech and human rights. Soon, all Americans may find themselves in the same bind.
Every major U.S. corporation that does business in China is now trying to balance the financial benefits against the risks. For years, few financial managers factored in human rights. But as Beijing becomes more repressive at home and more aggressive about enforcing political loyalty aboard, that calculation is changing.
“I think American businesses are waking up to the risks,” Secretary of State Mike Pompeo told “PBS NewsHour” on Wednesday. “It may seem that [doing business in China] makes profit in the short run, but the cost, the reputational cost to these companies, I think, will prove to be higher and higher as Beijing’s long arm reaches out to them.”
But did you know that millions of Americans are currently — often unwittingly — betting their financial futures on the future success of the Chinese government’s strategy? Without much oversight or consideration of the risks, Wall Street institutions are steering trillions of American investors’ dollars toward Chinese companies that are complicit in China’s military expansion and gross human rights abuses.
Congress is now making an effort to force these Wall Street firms to stop exposing American investors’ financial futures to Chinese companies that are not only beholden to the Chinese Communist Party but also in many cases directly involved in repression. The Chinese government is hoping Americans don’t realize what’s going on until it’s too late.
In August, Sens. Marco Rubio, R-Fla., and Jeanne Shaheen, D-N.H., wrote to Michael Kennedy, the chairman of the Federal Retirement Thrift Investment Board (FRTIB), which administers the pensions of more than 5 million federal employees and military service members. They demanded he reverse the board’s decision to steer over $50 billion in the federal Thrift Savings Plan (TSP) toward China.
In 2017, the board decided to have the TSP’s international stock fund mirror the MSCI All Country World ex-USA Investable Market Index, beginning next year. MSCI, the world’s largest index provider, has been steadily increasing its holdings of Chinese assets, reportedly under severe pressure from the Chinese government.
“The FRTIB’s decision to track this MSCI index constitutes a decision to invest in China-based companies, including many firms that are involved in the Chinese Government’s military, espionage, human rights abuses, and ‘Made in China 2025’ industrial policy,” the senators wrote.
The index invests in Chinese companies that build equipment for the People’s Liberation Army (PLA), have been repeatedly sanctioned by the United States for proliferating dangerous weapons, and assist Chinese government repression in places such as Xinjiang, where more than 1 million Uighur Muslims have been interned in camps.
One of these companies, Hikvision, was just this week added with seven other firms to the Commerce Department’s list of banned entities. The reason: It produces the surveillance cameras used in the Xinjiang camps. When Hikvision was sanctioned, its stock took a hit, understandably. If millions of federal workers were invested in this fund, their 401(k) accounts would take a hit, as well.
In addition to the added risk for investors, it doesn’t make policy sense to sanction a Chinese company and then allow the same company to raise money from U.S. capital markets, Shaheen told me.
“As it stands, if this change goes into effect, national security professionals who work daily to sanction companies that threaten the U.S. will likely invest their retirement savings in some of those very same companies,” she said.
In a letter to the senators, the board said it was reviewing their concerns and would decide later this month whether to move forward with the plan. But even if the board changes course, millions of other American investors are still passively investing in illicit Chinese companies. Nearly $14 trillion in U.S. investment funds follow the MSCI indexes or use them as a yardstick.
The typical response from Wall Street types is that Washington China hawks can’t be allowed to politicize investment decisions. But that argument misses the point; the risk is there because Beijing insists on weaponizing its economic leverage. Americans are becoming increasingly vulnerable, whether we point it out or not.
“It would be ludicrous to claim that taking steps to avoid investing in Chinese concentration camps, sanctions violators, proliferators, PLA weapons manufacturers and other corporate abusers constitutes ‘politicizing’ our capital markets,” stated Roger Robinson, chief executive of RWR Advisory Group, a Washington-based risk consultancy.
The NBA is finding out the hard way that its financial exposure in China is a huge risk to its bottom line. American investors must make sure they don’t find themselves, like the NBA, in a position where the Chinese government forces them to choose between their pocketbooks and their values.