American investors are unintentionally funding Chinese companies embargoed for their association with China’s military or alleged human rights abuses, a congressional committee probe has found.
It emerged after the committee last year notified BlackRock, the world’s largest asset manager, and MSCI, the world’s foremost index provider, of a congressional probe involving scrutiny of the wider U.S. financial sector.
In 2023, Chinese companies received funding totaling $6.5 billion via U.S. capital markets, of which, over $5.3 billion was directed to finance the regime’s military enterprises, while over $400 million supported known human rights violators and entities involved in forced labor.
More than $1.2 billion was allocated to companies associated with those listed on the U.S. Department of Commerce’s trade blacklist, the Entity List, with over $350 million directed to entities directly listed therein.
Through financial products offered by the country’s financial industry, Americans’ hard-earned savings and retirement funds are supporting the military advancement of a foreign adversary and the development of tools used by the CCP to infringe upon human rights, according to the report.
“Many investors may have no idea,” the panel said, adding that while these investments were not illegal, they want Congress to pass legislation that would restrict investment in blacklisted entities, as well as require U.S. public companies to disclose risks related to China.
“Congress must act to restrict U.S. investment in entities tied, directly or indirectly, to the PLA, critical technology sectors, or forced labor and genocide,” the report said. This is because the current rules forbidding investments in certain Chinese firms due to concerns about human rights abuses or threats to national security are inadequate, the report explains.
Aviation Industry Corp. of China, a defense corporation that manufactures airplanes for the People’s Liberation Army, and Daqo New Energy Corp., a firm linked to Uyghur forced labor, were among the Chinese enterprises that received funding.
When building investment portfolios for institutional endowments and retirement plans, asset managers such as BlackRock apply indexes provided by companies like MSCI. These indices can attract investments from the United States, even if a company or its affiliates are on a U.S. government blacklist.
“Neither company has taken meaningful steps to mitigate or reduce the risk, and both maintain that they have limited discretion to independently exclude specific problematic entities,” the report said.
Growing Tensions
Reflecting former President Donald Trump’s election strategy of imposing more tariffs on China, President Joe Biden has adopted a similar approach as part of his election-year agenda.This week, the administration initiated an investigation into what it claims are China’s efforts to dominate the maritime, logistics, and shipbuilding sectors. Many experts now predict that the outcome of this investigation, along with an ongoing multi-year review of Trump-era trade policies, will lead to further tariffs on imports from China.
Furthermore, the world’s two largest economies find themselves at odds over Russia’s invasion of Ukraine, a situation that has not only escalated tensions between Washington and Beijing but has also strained relations between Beijing and the European Union.
However, other big index providers and asset managers also send billions of dollars to the same companies that were highlighted, so it’s not just BlackRock and MSCI, the report said. It added that such asset managers continue to include several Chinese businesses on US government red-flag lists in their indexes and funds.
According to the panel, the congressional investigation highlights the need for greater regulatory scrutiny and investors need to understand that geopolitical concerns can intersect with investment practices, potentially leading to future regulatory actions to address these issues.
The report suggests that Congress should enact legislation to limit investment in companies and their affiliates blacklisted by the U.S. government, mandate U.S. public companies to disclose risks associated with China to investors, and bolster the resilience of U.S. financial institutions to market uncertainties related to investments in China.
“It is imperative that Congress further expand the United States’ investment restriction toolkit. The industry should support this effort,” it said.
