Should We Fund the ‘Nazis’ of the 21st Century?

A man looks at an electronic board showing a downward graph of the share prices index at a securities company in Chengdu, in China's southwestern Sichuan Province, on March 18, 2008. Liu Jin/AFP via Getty Images

Originally published by Gatestone Institute

Commentary

They certainly can’t be happy in Beijing. An exceedingly technical administrative decision in Washington will soon result in investors pulling tens of billions of dollars in investments from a cash-strapped China.

On Nov. 14, the Federal Retirement Thrift Investment Board changed the benchmark for the Thrift Savings Plan’s International Stock Index Investment Fund, better known as the I Fund.

Previously, the I Fund tracked the MSCI Europe, Australasia, and Far East Index. The Thrift Board decided on Nov. 14 to instead track the MSCI All Country World ex USA ex China ex Hong Kong Investible Market Index.

The new index doesn’t include Chinese and Hong Kong stocks, so to match the assets of the I Fund to the new index, the Thrift Board will have to sell Chinese and Hong Kong stocks and not buy them in the future.

The switch in indices of the Thrift Savings Plan, essentially the 401(k) plan for federal employees, will take place next year.

Sound unimportant?

The Thrift Board made one of the most consequential investment decisions of the year, and it will undoubtedly affect allocations of other investment managers, in the United States and perhaps elsewhere. In short, this move will be a blow to China’s failing equity markets, delivered at the worst possible moment for Beijing.

Participants had invested $68 billion in the I Fund as of the end of October.

The Thrift Board’s decision is a “major victory” for those, such as Roger Robinson, who had been campaigning for years to get the Thrift Savings Plan, known as the TSP, to divest from China.

“The new MSCI ex China ex Hong Kong index employed for the I Fund sets a precedent for the exclusion of all Chinese companies,” Mr. Robinson, the National Security Council’s senior director for international economic affairs under President Ronald Reagan and now chairman of the Prague Security Studies Institute, told Gatestone. “This precedent should be adopted by other U.S. index providers and associated exchange-traded and other index funds.”

“There remain hundreds, if not thousands, of Chinese enterprises littering the investment products of the TSP-sponsored Mutual Fund Window,” he said. “The TSP Act of 2023 would accomplish this urgent undertaking.”

Wall Street for years has been in love with Chinese companies even though they had clearly earned failing grades across the board for, among other things, fiduciary responsibility, labor practices, and human rights. While prices were rising, the Street ignored concerns. Now, they’re weighing heavily on investment managers.

We can see why. Chinese stocks have taken a hit this year. The widely followed CSI 300 Index, which tracks stocks listed in Shanghai and Shenzhen, has dropped by 8.6 percent since the last trading day of 2022. Chinese stocks listed in Shanghai, Shenzhen, Hong Kong, and New York have lost about $955 billion of market capitalization this year. Stocks would have dropped even more were it not for sustained Chinese government intervention. The plunge in the renminbi against the dollar this year has further eroded returns.

Investors have noticed. More than three-quarters of the foreign cash invested in Chinese stocks in the first seven months of this year has already been withdrawn from China. In excess of $25 billion has exited the country.

Moreover, during the last quarter, foreign investors took out more money than they put in, the first such drop since statistics were first reported in 1998.

Chinese economic news has become downright scary, and, unfortunately for China, there’s no such thing as a brave money manager. China’s leader Xi Jinping, therefore, came to San Francisco last month to reassure investors. On Nov. 15, the day following the Thrift Board’s historic decision, he delivered a speech to obsequious U.S. executives but failed to address the concerns that triggered this year’s outflow of cash. As a result of what The Wall Street Journal termed Xi’s “tone deaf” remarks, investment managers are bound to follow the Thrift Board’s decision and change their benchmarks as well.

There’s another side to the investment coin: China’s companies have been raising cash in U.S. public markets. The number of listings of Chinese companies in the United States increased 10 times during the past two decades. As of January, there were 252 Chinese companies, with a total market capitalization of $1.03 trillion, listed on the NYSE, Nasdaq, and NYSE U.S. stock exchanges.

China’s companies for decades essentially had a free ride: As a practical matter, they didn’t have to meet U.S. disclosure requirements, which applied to companies from all other countries. This unjustified preferential treatment was reduced somewhat in August 2022, when the Public Company Accounting Oversight Board surprisingly clinched an agreement with Chinese regulators to give the United States access in Hong Kong to the audit papers of Chinese companies.

So why should companies continue to get special access to U.S. equity markets just because they come from China?

Or why should they have any access at all? “If you understand that we are already in an economic war with China, it seems foolish to grant access to our markets,” Kevin Freeman, host of BlazeTV’s “Economic War Room,” told Gatestone. “Imagine funding the Nazi war machine in the late 1930s. Delisting military-related companies should be obvious. Under Communist Party dictates, any Chinese company can be made to serve military interests at any time.”

The Chinese economy and financial markets are fragile. It’s time to cut off all the blood supply to the Nazis of the 21st century.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.