Tencent’s stock lost more than ten cents on the dollar last week after the U.S. Department of Defense blacklisted it for working with China’s military, costing China’s largest public company $60 billion of market value. Unfortunately, state and local pensions across the country also took a hit due to their broad exposure to Chinese companies like Tencent.
What happened to Tencent was not an anomaly. State leaders must force the U.S. investment community to wake up to the extraordinary fiduciary and geopolitical risks that come with investing in China and rapidly divest their billions in public funds from China for fiduciary, national security, and human rights concerns. Nearly all major Chinese companies are a part of the Chinese Communist Party-state’s civil-military fusion strategy. It’s a question of when, not if, they will end up in the crosshairs of the U.S. national security community.
State pension managers are making it harder for America’s national security community to do their job by laying state pensions on the financial tracks ahead of the federal sanctions train. National security actions cost states millions because federal sanctions drive down the value of Chinese companies held in state portfolios. Perhaps more incredibly, pension managers often continue investing in Chinese companies after they have been blacklisted by the federal government. This is self-defeating fiduciary malfeasance by state managers.
For example, Washington State public funds hold eight DoD-blacklisted Chinese Military Companies among billions invested in China, according to Hudson Institute scholar Pieter van Wingerden. Pension programs in New York, California, and Illinois advertise massive direct stakes in Tencent. State pension managers jumped out of the frying pan and into the fire by pouring at least $68 billion in new money into China after Russia invaded Ukraine.
China’s big companies aren’t the blue-chip stocks of the Dow Jones Industrial Index. Of China’s 15 largest companies by market capitalization, four (Tencent, China Mobile, CATL, CNOOC) are blacklisted by the U.S. Defense Department. Two more are e-commerce giants Alibaba and Temu, which slumped on the news of Tencent’s blacklisting and have faced national security, data privacy, and forced labor investigations. Five more are China’s big banks, which Harvard Senior Lecturer Daniel Koss says are increasingly subject to CCP loyalty and political tests over profits. Political cells and militia units abound within China’s big companies.
The risks don’t stop there. Most of the roughly 1,000 Chinese companies listed on American exchanges are derivative instruments called variable interest entities (VIEs) that are the equivalent of “fantasy football warrants,” according to Hayman Capital hedge fund manager Kyle Bass. “VIEs have no ownership directly to the entity in China…there’s nothing underneath.” And you can’t audit the Chinese company that you don’t actually own because Chinese VIEs aren’t subject to U.S. audits.
What’s worse is that China is openly and brazenly preparing to invade Taiwan. After two years of unprecedented blockade and invasion drills around Taiwan, new open source intelligence shows that the People’s Liberation Army’s Navy is rapidly building special barges for amphibious assault. State pension managers foolishly ignored the warning signs of Russia’s pending invasion of Ukraine and lost billions invested in Russia as a result. There is no excuse for making the same mistake on a larger scale.
Considering China’s rapid preparation to invade Taiwan and China’s largest company being sanctioned by the federal government, every public pension needs to audit their funds and divest Chinese holdings. No new venture capital or private equity money should go into China. Pension managers must dispose of both direct holdings and ETFs and indexes with Chinese exposure. For example, the MSCI emerging market index is 28% Chinese stocks, and Tencent is the second-largest holding of the index’s 1,252 constituents.
The $800 billion federal THRIFT Savings plan divested from China more than a year ago. Texas Governor Greg Abbott moved global markets by announcing Texas would completely divest from China in November. Thirteen other states have taken official actions to divest from China, and 20 state financial officers representing 17 states have signed a letter calling for total divestment.
State leaders should also bring accountability to pension managers who have financed China’s military buildup and human rights abuses. Asset managers have a fiduciary duty of care, which includes monitoring and investigating investments. At best, it’s impossible for managers to investigate China-based investments, and at worse, they understand the malfeasance they are funding. Not a single penny more should go into China, or into the asset managers who can’t see the writing on the wall as China prepares for war.
Michael Lucci is the Founder and CEO of State Armor Action, a 501(c)(4) non-profit advocating for policy solutions to the global threats posed by the CCP.
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