Some American institutional investors, pushing for the highest returns, could be hanging themselves and destroying the country, critics say.

That’s because several big American money managers are investing through retirement funds in China, according to critics who want these investments reviewed.

They contend American dollars fund Chinese venture capital firms, undercutting American businesses and violating human rights.

“Can anyone explain to me why the Maryland State government is helping tech startups in China to compete with U.S. companies? MD pension fund invests in Chinese government-influenced VC fund,” wrote Rob D. Atkinson.

Atkinson, who made his comments on Twitter, is the president of the Information Technology and Innovation Foundation (ITIF). It is a Washington, D.C. based technology think tank.

Calling Maryland

Michael Golden, a spokesman for the Maryland State Retirement Agency, didn’t respond to numerous phone and email requests on why the state fund is expanding its China ties.

Maryland State Retirement & Pension System, in a-December filing with the Securities and Exchange Commission, reported that it increased its stake in Yum China Holdings, Inc “by 3.4% in the 3rd quarter,” according to its most recent 13F filing. The institutional investor owned 32,072 shares of the company’s stock after acquiring an additional 1,065 shares during the period.

Maryland State Retirement & Pension System’s holdings in Yum China were worth $1,897,000 at the end of the most recent quarter, the SEC reported.

Yum China Holdings operates restaurants and fast-food chains in China, including Kentucky Fried Chicken and Pizza Hut restaurants. However, several analysts have recently rated it as a sell. In November, Zack’s Investment Research downgraded it from a hold to a sell. TheStreet in November dropped its rating from b to c+.

Asked why some American pension funds are investing in China, Atkinson said most state pension funds are underfunded. “They are underfunded because they have given in to the demands of state employees,” he added.

Big Money Manager Defends Itself

BlackRock, a big money manager with huge investments in China, defends its practices. A spokesman argues it is doing the best for the investor.

“The assets we manage are not our own, they belong to our clients. Our obligation as an asset manager and a fiduciary is to manage those assets consistent with our clients’ objectives and choices,” a BlackRock spokesman said.

But a critic of Chinese investing said Black Rock isn’t acting in a fiduciary manner.

“In China it is illegal for foreigners to actually own shares of those companies. We question whether those returns are real, with the way that BlackRock is investing,” said William Hild, executive director of Consumers’
Research, a conservative watchdog group that has been critical of BlackRock.

Hild notes China has no generally accepted accounting standards (GAAP). He points to a July 30th statement by SEC Chairman Gary Gensler on U.S. Chinese investments.

“To raise money on such exchanges, many China-based operating companies are structured as Variable Interest Entities (VIEs),” Gensler wrote.

In such an arrangement, a China-based operating company typically establishes an offshore shell company in another jurisdiction, such as the Cayman Islands, to issue stock to public shareholders,” according to Gensler.

“That shell company enters into service and other contracts with the China-based operating company, then issues shares on a foreign exchange, like the New York Stock Exchange.”

The shell company. Gensler added, has “no equity ownership in the China based operating company.” He is calling for reforms in China.

This Must End

Atkinson contends seeking higher returns doesn’t excuse investing taxpayer dollars with a major competitor that could destroy the United States.

“We just can’t do this anymore because many of these companies will start competing against us,” he adds. We don’t want to start advancing the rapid development of the Chinese technological economy.”

Atkinson, in an interview, noted Maryland pension funds are underfunded. “I don’t blame Maryland for doing this. But the point is that individual rationality can lead to collective irrationality.”

He believes that it “is incumbent upon the federal government to ensure that any federal aid should be dependent on a state not investing in Chinese companies.”

More than Maryland

Atkinson’s complaints are with more than Maryland officials. Many exchanges routinely list Chinese companies. Many Americans, unaware of the dangers critics contend, are buying their shares.

U.S. investors put $458 billion into Chinese and Hong Kong stock exchanges and bonds, an estimated $302 billion, of which is held by mutual and pension fund, according to Richard Manning, president of Americans for Limited Government. He filed these comments with the U.S. Labor Department on December 13. He cited Department of Defense (DOD) numbers.

DOD listed 44 companies listed on U.S. stock exchanges that are either owned or controlled by the Chinese Communist Party, Manning said.

This, Manning asserted, is the critical point: Many investors don’t know what they are buying.

“China did not suddenly stop controlling its state-run enterprises or using slave labor and this is nothing more than a dereliction of duty that should not be repeated,” according to Manning.

The Governors Called Upon to Act

BlackRock has close ties to China, Hild noted. He sent a letter to 10 governors asking that they re-assess relationships with China.

“These ties date back to the early 2000s and create concerning conflicts that consumers should be aware of. These ties start from the top. BlackRock’s CEO, Larry Fink, has become a trusted partner with China’s communist leadership,” Hild wrote.

Black Rock officials said they disagree with these criticisms and the campaign to persuade big money managers to disinvest from China.

“As a fiduciary to our clients, BlackRock focuses on matters like diversity in the boardroom and climate risk because we believe these are material issues that can affect the long-term value of our clients’ investments,” said a BlackRock spokesman. “Those are the issues the funders and leaders of this campaign do not appear to agree with.”

However, Hild dismissed these arguments. He noted that recently the U.S.-China Economic and Security Review Commission, a body of security and economic experts convened by Congress, recommended the United
States curtail, not expand, economic ties with China.

In its 2021 report to Congress, the commission said that the clash of identities and sovereignty is about the safety and security of the United States, its partners, friends and allies.

The CCP Is an Adversary

The Chinese Communist Party (CCP), the commission wrote, “is a long-term, consequential, menacing adversary determined to end the economic and political freedoms that have served as the foundation for security and prosperity for billions of people. Each decision the United States makes over the coming months and years must be taken in consultation with concerned partners and be purposefully directed at upholding an international system that has largely served us well.”

Without the right policies, the report said, “we will continue to see the slow but certain erosion of the security, sovereignty, and identity of democratic nations.”

Hild says Americans must understand the “multiple risks posed by BlackRock’s extensive investments in Chinese companies, both from an ethical standpoint as well as the fiduciary responsibility owed to U.S. pension holders and retirees.”

We Should Engage

Still, the BlackRock spokesman said that, by engaging with China, the money manager will encourage improved financial norms.

“BlackRock,” the spokesman said, “is committed to continually pushing for improved standards, governance, and accounting transparency from all companies and countries wherever they are operating in the world. Our approach to China will be no different.”

Nevertheless, Hild is unconvinced. Still, he seems to generally agree with BlackRock on one point: The debate over Chinese markets is about more than finding profitable investments.

“Investment in Chinese companies,” Hild told the governors in the letter, “could also make U.S. investors unwitting accomplices in the expansion of the Chinese Communist Party’s surveillance and intelligence gathering apparatus, or worst yet, make them party to human rights abuses like the ongoing genocide against Uyghurs in Xinjiang, China.”

Late last month Florida Governor Ron DeSantis announced his state’s pension funds would no longer be invested in China. He complained some American companies are apologizing for tyranny.

“If you look at how these major companies behave when faced with Chinese disapproval, they censor what the CCP tells them to censor and we see groveling apologies,” the governor said.

“Go back a generation, and the idea of the American elites was, ‘If we allow China into the WTO and give them most favored nation status, that will make China more like us.’ This experiment has failed and it has endangered our nation’s national and economic security.”

Look at Those Returns!

However, the allure of big returns combined with underfunding pension systems still seems important. Florida officials are the only ones who have responded to the Consumers’ Research complaints and disinvested, Hild said.

Still, BlackRock officials insisted: “Our approach to Chinese related investments is consistent with U.S. foreign policy.”

Atkinson also complained that many American institutional investors aren’t following Florida’s lead. They may be following the prediction, he said, of one of the most important Communist leaders in history.

He noted Florida officials are the only ones who have responded to the Consumer Research complaints and decided to disinvest.

Lenin’s Prediction

Vladimir Lenin, the founder of the Soviet Union, famously said the capitalist was so avaricious that, if he got a good price, he would sell the rope to the Communists. They would hang him.

Atkinson, a student of economic history who praises economist Joseph Schumpeter and the concept of “creative destruction,” warns: “The only way you can keep a capitalist from not hanging himself is to have a rule that says he can’t hang himself.”

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Gregory Bresiger
Gregory Bresiger

Gregory Bresiger is an independent financial journalist from Queens, New York. His articles have appeared in publications such as Financial Planner Magazine and The New York Post.

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