BlackRock, the globe’s preeminent asset manager and MSCI, a leader in the compilation of stock-market indices, are now at the heart of an investigation launched by the House of Representatives’ Select Committee on the Chinese Communist Party. Notifications of this investigation were issued to both companies last Monday, as per letters obtained by The Wall Street Journal. Americans’ retirement funds are unwittingly fueling Chinese firms the U.S. has flagged because security and human-rights issues, lawmakers say
“By routing ‘massive flows of American capital’ to these Chinese entities, the U.S. firms are ‘exacerbating an already significant national-security threat and undermining American values,'” argued the committee letters, signed by the panel’s chairman, Republican Rep. Mike Gallagher of Wisconsin, and its top Democrat, Rep. Raja Krishnamoorthi of Illinois.
BlackRock, with more than $9 trillion of Americans’ assets under its management, and MSCI, shaping over $13 trillion worth of assets with its product portfolio, are now caught in a precarious situation due to their indirect role in aiding questionable Chinese companies, companies whose purposes are to the detriment of the Western world.
In response, BlackRock issued a statement, “We will continue engaging with the Select Committee directly on the issues raised.” The company further pointed out that “the majority of our clients’ investments in China are through index funds.” MSCI echoed a similar stance, indicating it was “reviewing the inquiry” and emphasizing that its index decisions were driven by consultations with a broad range of global market participants.
The Congressional panel expressed concern that, although not illegal, the activities of these firms have indirectly guided Americans to financially back over 60 Chinese companies flagged by US agencies for concerns related to security or human-rights. They discovered that across five funds, BlackRock alone has funneled more than $429 million into such contentious Chinese entities.
While the committee lacks legislative authority, it possesses a mandate to subpoena and boasts bipartisan backing. Its primary aim is to accumulate facts that will inform and shape American policy towards China, particularly with regards to the flow of capital.
The congressional committee, established this year, has its crosshairs trained on the role of U.S. companies and financial institutions in driving China’s ascent. It seeks to weave a narrative that can be easily grasped by the public. The current investigation aligns with possible legislation that, once passed, will compel U.S. entities to report their investments in sensitive technologies in adversary countries like China to the Treasury Department. Concurrently, the panel expanded its focus with a probe into U.S. venture-capital firms funding Chinese start-ups specializing in AI, semiconductors, and quantum computing.
This probe has reignited the long-standing debate regarding the prudence of investing American retirement savings in Chinese companies identified by the U.S. government as potential threats.
Notably, MSCI added Chinese stocks to its widely-tracked Emerging Markets Index in 2018, leading to an inflow of billions of dollars into these companies. This decision was reportedly influenced by pressure from the Chinese government. Additionally, BlackRock’s move to raise money for a Chinese mutual fund two years ago sparked controversy, with some warning of financial losses for BlackRock clients and potential harm to U.S. national-security interests.
The Chinese Embassy in Washington weighed in on this issue, arguing that “politicizing economic, trade, and investment issues runs counter to the principles of a market economy.” Despite escalated US-China tensions, it’s worth noting that investments in Chinese companies have historically yielded substantial returns for investors.
For the most part, the investment world only craves a level playing field. If they are allowed to invest in China, they will do it where profitable. If companies in China are not restricted for investment by U.S. investors, then U.S. investment will find its way there. On the other hand, these are such huge investment firms that they have special insights into what companies are detrimental to the U.S. and should indeed be advising Congress on these matters. It is up to Congress to pass the laws and create the new, but level, playing field for U.S. investment firms.