US-China Battle Hits Finance as Senators Try to Block Pension Investment


The confrontation between the US and China is spreading from trade to the financial markets as lawmakers urge a major government retirement fund to abandon plans to invest in Chinese shares, which they say will fund Beijing’s efforts to undermine US economic and national security.

Republican Senator Marco Rubio of Florida joined with Democratic Senator Jeanne Shaheen of New Hampshire to write to Michael KennedyOpens a new window , chairman of the Federal Retirement Thrift Investment Board, urging him to reverse “a short-sighted decision” to mirror the MSCI All Country World ex-US Investable Market Index in one of its funds.

The board is an independent agency set up to manage the Thrift Savings Plan, the main retirement savings vehicle for federal employees, and the largest defined contribution plan in the world. The globally-oriented I Fund is the subject of the lawmakers’ criticism.

Not an idle question

The members of the Senate’s Foreign Relations Committee say that starting next year, the decision would expose nearly $50 billion in retirement assets of government employees — out of a total $578 billion — to severe material risks associated with Chinese companies.

Senators don’t just write letters; they ask questions and they wield oversight power over federal agencies and their employees. For good measure, the senators copied the letter to Mike Pompeo, Steven Mnuchin and Mark Esper, secretaries of the State, Treasury and Defense departments respectively.

The Rubio-Shaheen letter demands a response to its questions no later than September 6.

The letter is the latest sign of a backlash against China that continues to grow in Washington as the Trump administration punishes alleged trade violations such as subsidizing exports, forced transfer of technology and predatory currency devaluation. Bipartisan mistrust is growing amid China’s military build-up and alleged spying through electronic networking productsOpens a new window .

Looking for due diligence

The lawmakers acknowledge that the investment board’s decision to mirror the index was based on factors such as general market exposure, liquidity and transaction costs, but they question whether any due diligence was carried out regarding national security, human rights or financial transparency.

They says that several of the Chinese companies in the index, some of them partly state-owned, are involved in the government’s military, espionage, human rights abuses and “Made in China 2025” industrial policy, posing fundamental questions about the board’s fiduciary responsibility.

The letter gives several examples. For instance, the index or sub-indexes have included a Chinese aviation conglomerate that develops manned aircraft, unmanned aerial vehicles, missiles, and other weapons systems for the country’s armed forces — and that has been repeatedly sanctioned for dealings with Iran, North Korea and Syria.

Other companies are engaged in mobile communications or surveillance camera systems that have landed them on lists of businesses banned from federal contracts. In addition, the senators say, there are well-documented financial disclosure abuses.

Hardening attitudes

The questions for which they’re seeking answers are precisely about the due diligence regarding national security, or whether the board was aware that some companies have been censured by the US government either before or after the decision to invest.

They also want to know whether the board plans to disclose to federal employees the risks of investing in companies that supply the People’s Liberation Army, and what alternatives the board considered to shield scheme participants from exposure to the risks inherent in Chinese companies.

Of course, the MSCI index also includes tech giants such as Tencent and Alibaba, which have millions of shareholders around the world and that have no affiliation to the Chinese state.

However, the bipartisan letter is typical of a harsher stance toward China. Stephen Hadley, a national security adviser to former President George W. Bush, pointed recently to a hardening of attitudes among the foreign policy elite in the US National security agencies that are now treating China as an enemy — and investment may become a weapon.