A comprehensive report from the House Select Committee on competition between the U.S. and the Chinese Communist Party (CCP) reveals that billions of investment dollars from Wall Street firms are flowing into Chinese companies that have been blacklisted by the U.S. government.
The report shows that asset managers and index providers have invested $6.54 billion in 63 companies flagged by the U.S. government for advancing China's military capabilities or supporting human rights abuses. The panel said the activity was not illegal, but it called for Congress to pass legislation that would restrict investment in blacklisted entities.
According to the Coalition for a Prosperous America, 4,200 unregulated Chinese companies are in the investment portfolios of scores of unwitting investors. These Chinese companies are not protected by the same laws that normally protect American investors The majority of American investors are not aware that their mutual funds have Chinese companies that may not be compliant with U.S. laws. They don’t know that their hard-earned savings or pension plans may be funding a totalitarian police state dedicated to overtaking the U.S. as the number one economy.
In their ongoing efforts to find the best returns for their clients, Wall Street firms including Blackrock and Vanguard have exposed American retail and institutional investors to a wide range of publicly traded Chinese companies that are involved in developing weapons systems and new technologies and building infrastructure in support of China’s military modernization goals.
Millions of average Americans—via their pension funds, mutual funds, ETF holdings and other retirement products—are unwittingly investing in Chinese companies involved in serious technology theft and/or implicated in the genocide of the Uyghur people, a Muslim ethnic minority in northwest China.
During their presidencies, both Donald Trump and Joe Biden have issued executive orders banning Wall Street from investing in Chinese defense contractors and state-owned companies. But the sanctions only cover a small percentage of offenders (only 44 Chinese companies have been delisted as of May 2021). Sanctioning capital markets is a target-rich environment that is in its infancy, and it is time for the U.S. enforce the executive orders.
The Biden administration is trying to prevent American investors from buying stock in companies tied to China’s military industrial complex. Eight Chinese companies were recently added to the entity list that were assisting the Chinese military’s quantum computing efforts, which support military applications such as counter-stealth and counter-submarine applications and the ability to break encryption codes.
Biden signed an executive order that would restrict U.S. investment in some high-tech industries in China. But the executive order does not go far enough and only affects quantum computing, artificial intelligence and advanced semiconductors.
The Cold War with China
The U.S. is in an economic struggle with China, and China is using all of the tools available to their authoritarian regime to overtake us.
In his book “The World Turned Upside Down,” economist Clyde Prestowitz wrote: “The Cold War with the Soviet Union was just a warm-up game for the main match now to come.” He goes on to say that the U.S. “must make it clear that the interests of the country and of freedom outweigh those of global corporations and investment bankers.”
However, many of the large financial firms on Wall Street continue to pursue their own short-term interests rather than what is good for the nation’s future. They don’t seem to acknowledge (or don’t care) that investing in Chinese companies is really investing in an authoritarian state.
Vanguard, Blackrock and others continue to invest in Chinese companies that are on the Department of Commerce ‘s entity list for national security concerns, as well as companies who are part of the China military industrial complex.
Blackrock and MSCI
The House Select Committee’s report focused on two companies — the world's foremost stock index provider, MSCI, and the world's largest asset manager, BlackRock .
The report, titled “Case Study for Congress: BlackRock & MSCI: How Wall Street’s Offshore Companies Fund the CCP & PLA," provides analytic evidence that BlackRock, and MSCI, “are investing in Chinese military companies and companies sanctioned by the U.S. government for their involvement in Beijing’s ongoing use of forced labor and genocide against the Uyghurs.”
The report shows that “BlackRock’s offshore funds have about $130 million invested across 14 Chinese Military-Industrial Complex companies listed on China stock exchanges.” It concluded that MSCI indexes alone channeled $3.7 billion and BlackRock invested at least $1.9 billion into these red-flagged entities. According to Coalition for a Prosperous America:
- BlackRock funds own 18 Chinese companies on the Commerce Department’s Military-End User List or Entity List.
- BlackRock has nearly $200 million invested in companies that help produce nuclear warheads capable of striking the continental United States.
- BlackRock funds own four companies on the Uyghur Forced Labor Prevention Act Entity List.
- BlackRock has formed a joint venture with the state-owned China Construction Bank (CCB) to penetrate the mainland’s $9 trillion asset management market.
BlackRock can get away with these investments because they are in foreign exchanges. Such investments would be illegal if they were held in the United States. Blackrock recommended in 2021 that investors triple their allocations in Chinese assets.
Vanguard and FTSE Russel
A 2023 Coalition for American Progress report found that Vanguard has roughly $8 trillion in global assets and, like Blackrock, is investing the retirement and investment dollars of American citizens in Chinese companies and corporations sanctioned for human rights abuses.
Much of these investor funds provide investment capital to the Chinese Communist Party (CCP) and are also used to modernize the People’s Liberation Army (PLA). “These corporate stocks are non-compliant with American federal securities laws as well as regulatory and accounting standards designed to protect U.S. investors,” the report states.
Specifically, CPA’s report identified the following holdings in Vanguard’s flagship emerging markets index fund (ticker VWO):
- 60 subsidiaries of Chinese military industrial complex companies (CMIC)
- 56 subsidiaries of Chinese military companies operating in the United States to obtain advanced technologies
- 20 companies denied access to U.S. technology because they are deemed “military end users”
- 8 Chinese companies excluded from U.S. commercial markets for violating the Uyghur Forced Labor Prevention Act (UFLPA)
- Numerous Chinese companies specializing in “quantum information technologies, artificial intelligence, and microelectronics.”
Venture Capital Companies
The House China Committee also investigated five venture capital companies (GGV Capital, GSR Venture, Sequoia Capital China, Qualcomm Ventures, and Walden International). These five firms have invested $1.9 billion in companies that support Chinese artificial intelligence, China’s military or China’s human rights abuses. They have invested another $1.2 billion into the Chinese semiconductor sector. One wonders what it would take to convince these venture-capital firms that investing in China’s technology companies is not in the interests of the country or national security?
The Iran Connection
A new report from the Prague Security Studies Institute (PSSI) identified 40 Chinese companies in U.S. capital markets that have links to Iran. Eight of these companies have ties to the Iranian military, and nine are involved in Iranian communications and surveillance industries. The U.S. has economic sanctions on Iran, so the question is, “Why does the Biden administration allow Chinese companies who support Iran into our capital markets?”
In the last several years, both the House and Senate have offered legislation that would stop or restrict Wall Street firms from investing in Chinese companies that actively assist the Communist Party, work to modernize the People’s Liberation Army, or support the genocide and human rights abuses against the Uyghurs. But Congress just can‘t seem to get their act together and pass some legislation that would protect U.S. retail investors and pensioners.
We need legislation that would make it illegal for American asset managers to invest in Chinese companies that have been sanctioned. Chinese companies should only be able to access U.S. capital markets if they are in compliance with all U.S. laws for transparency and accountability.
For decades, Wall Street has profited by helping the Chinese Communist Party (CCP) fund its companies via U.S. capital markets, exploiting tens of millions of unwitting American investors in the process. When it comes to profit-seeking, Wall Street apparently just cannot help itself.
