For much of the summer, a bipartisan group of House and Senate lawmakers has been trying to convince colleagues to restrict or ban investments in China. To them, American investors, large and small, should not be funding Chinese military equipment makers, biotech labs or companies accused of using forced labor. We have no rival like China, they say. Why keep throwing money at them so they can surpass us in every way—be it in technological prowess or military might?
The White House seems open to hearing them out: President Biden recently issued an executive order to restrict venture capital investments in China’s advanced technology companies. Even though this is more of a symbolic move than a meaningful one, it still shows where Washington is heading with regard to American investments in China.
The newly created House Select Committee on the Chinese Communist Party is constantly beating up on China investors. In July, it sent letters to three American venture capital firms inquiring about their investments in Chinese tech companies—namely quantum computing, artificial intelligence and semiconductor startups. In August, committee Chairman Michael Gallagher of Wisconsin was joined by four fellow Republicans on the Senate side in introducing a bill called the DITCH Act, which would remove tax-exempt status for public pension funds like CalPERS and the Harvard University endowment if they invest in China.
Perhaps the most notable action regarding U.S. investment in China is happening with federal pension plans: Sens. Jeanne Shaheen of New Hampshire and Marco Rubio of Florida want to prohibit federal employees from investing their retirement money in anything Chinese. “It is absolutely unacceptable that the Chinese Communist Party and government continues to profit from the retirement accounts of U.S. government employees and members of the military,” Rubio said in a statement. He and Shaheen have reintroduced legislation to ban federal employees from owning Chinese stocks and bonds through the federal government’s Thrift Savings Plan, a roughly $709 billion retirement plan.
The Washington-Wall Street Divide
Just this month, Jacob Helberg, a commissioner on the U.S.-China Economic and Security Review Commission, a group appointed from the private sector that’s tasked by Congress with gauging the China risk in the U.S. economy, said at a hearing: “I see no reason why government pension fund money should be invested in China.”
Wall Street does not agree. All the big investment firms have China funds, and many financial products are designed just for China. None of them want to relinquish China as an investment. The Shaheen-Rubio proposal is turning off some in Washington too—especially those in the Treasury Department, who are more Wall Street-friendly and would be the ones to oversee capital market sanctions through their Office of Foreign Assets Control.
Under the Rubio-Shaheen proposal, federal employees would be banned from investing in China. It wouldn’t matter what the company was. If it was Chinese-run and you worked for the federal government, whether as a postal worker, an Air Force captain or any other position, you couldn’t buy into a fund holding Alibaba stocks, for example. If the bill became policy, it would only affect those in the federal government employee retirement plans.
As for the rest of us, there are only three reasons why U.S.-based asset managers would sell Chinese stocks and bonds: 1.) the investments made them a lot of money and they are cashing in; 2.) they lost a great deal of money and are getting out before they lose more; or 3.) Washington told them to.
Washington has already told them to sell their China holdings. This affects every investor, not just those with money in federal government pension plans.
In 2020, the Trump administration put 31 Chinese defense contractors on a Treasury sanctions list and gave fund managers a year to sell off their investments. When Biden took over, he added to the list. Biden removed some companies from the list, but dozens of them, including former China darlings like China National Offshore Oil Corp. and China Unicom, a telecom giant, are no longer held by U.S. investors. Biden added those.
Washington already has a history of forcing Wall Street to stop investing in China. If Rubio, Shaheen and others want federal government employees to stop investing in China, there is an easy way to do it. In fact, it would ban the rest of us from buying these stocks as well.
Banning Chinese Companies from U.S. Retirement Accounts
The departments of Commerce and Homeland Security both maintain lists of Chinese companies deemed bad actors. In D.C. parlance, these blacklists are known as “entity lists”, with “entity” relating to a person, company or organization such as a school or research institution.
The Commerce Department Entity List is pretty long. If you’re on the list, it means a U.S. company needs permission from the government to sell to you. Nearly all of these export restrictions are on Chinese companies making tech products—some advanced, some not so advanced. But the Commerce Department has put those Chinese players on the list because it thinks they are selling goods to the Chinese military, or using them against the Uyghurs in the prison camps in Xinjiang. If Intel wants to sell goods to, say, China’s Semiconductor Manufacturers International Corp. (SMIC), it needs permission.
In 2020, AI chipmaker Cambricon Technologies Corp. raised about $368 million in a Shanghai initial public offering. Then in 2022, the Commerce Department put the company on their naughty list. Now U.S. companies can’t trade with them without permission.
SMIC has no U.S. investors in its stocks, but Cambricon does. Vanguard, BlackRock and Northern Trust are all investing client money in this banned entity. If you own the Vanguard Emerging Markets Fund, you are invested in a company that is required to obtain Commerce Department permission in order to do business with any American company. But fund managers are subject to no such requirement.
Homeland Security also has its own entity list that restricts imports from companies that allegedly make goods using forced labor. This list was created as part of last year’s Uyghur Forced Labor Prevention Act. Hoshine Silicon Industry Co. is on the list. Hoshine supposedly uses forced labor to make polysilicon used in the global solar panel supply chain. Their stocks trade in China, and Vanguard and BlackRock own them.
If you own the Xtrackers China CSI-300 exchange traded fund, you own a company that Homeland Security says forces Muslims to work against their will. You’ll have a hard time importing solar panels made from Hoshine materials, but you can give Hoshine a couple billion dollars of American investment capital. That’s easy. And that’s the law.
In August, Homeland Security added Chenguang Biotech Group to their Uyghur bad actors list. You can’t import Chenguang-made essential oils without running into problems. But fund manager USAA puts the money of their target customers—military members—into Chenguang stocks. It’s harder to buy Chenguang mint oil than it is to buy Chenguang shares.
If Congress is worried about U.S. investors funding China and about American investment capital funding what it says are human rights violators that are building a military industrial complex to rival the U.S., then it makes sense for Congress to tell Wall Street to ditch Chinese stocks. It’s not that difficult: Any publicly traded security on these two entity lists should be off limits.
Capital market sanctions would only affect a handful of entity list names because only a handful are publicly traded. If U.S. firms are hellbent on keeping those securities, they can buy them for their Asia-based clients instead. China can’t retaliate in kind because China has almost no investments in U.S. stocks. The Chinese government restricts outbound investments.
Democrats and Republicans want to make it harder to invest in China because they believe we are funding a dangerous rival at risk to our national and economic security. Banning entity list names makes sense. It has precedence already with the defense contractors being banned from U.S. capital markets. Investors should not be surprised if Washington catches on. Instead of banning all of China from federal government retirement funds, the Biden administration can pick companies already deemed to be up to no good. On the other hand, federal employees could just buy back these stocks in a separate E*Trade account if they really wanted to.
Putting capital market sanctions on Chinese companies might be the most modest approach of all, believes Robby Smith Saunders, vice president for national security at the Coalition for a Prosperous America, an advocacy and research organization that studies China’s economic security issues. “There are more bad actors than those on Commerce and Homeland lists,” she said, citing Commerce’s Military End User List, another export restrictive blacklist loaded with Chinese companies, and a Department of Defense list.
“If the U.S. was serious about stopping investment into China companies it does not like, then Congress needs to work with the Biden administration to create a whole-of-government approach to ending financial support to those entities, including from private equity and venture capital. The least we can do is combine sanctions on companies across those lists.”
Banning all U.S. investment in publicly traded entity list names isn’t a total ban on Chinese securities, but it’s the easiest compromise for those wanting China out of federal pensions. Two presidents told Wall Street they cannot invest in a bunch of Chinese companies, and they sold. No one can buy those stocks—not the Air Force captain in his government pension fund, and not his son who works in the private sector.
Commerce and Homeland Security don’t want American businesses to have normal trade relations with some Chinese companies, but Wall Street is allowed to. How does this make sense? When Washington says Wall Street can’t trade with them either, it takes those companies out of every American portfolio, yanking hundreds of millions of dollars away from China—something Washington claims it wants to do. Telling federal employees they can’t invest in China in their retirement plans, while allowing everyone else to, defeats the purpose of starving China of capital. Adding entity list names to capital market sanctions is the path of least resistance to those who want to squeeze America’s money flow to China.