Efforts by the federal government to clamp down on U.S. investments in China might be threatened by public pension funds investing tens of billions of dollars in the world’s second-largest economy.
American public pensions have invested about $68 billion over the past three years that ended on June 30, according to recent data from a nonpartisan trade group called Future Union. The organization’s research revealed that 72 pension funds in 42 states possess at least one public pension that has been invested in China or Hong Kong through various funds, including in sensitive industries. Thirty-nine percent made investments in the past 12 months.
Future Union says California and New York have been the chief contributors.
The New York State Common Retirement Fund (NYSCRF) dedicated the largest sum of cash of all public pension funds: $8.392 billion.
This was followed by the California Public Employees Retirement System and the California State Teachers Retirements System, which parked $7.8 billion and $5.559 billion, respectively.
Elsewhere in the United States, the Washington State Investment Board invested $5.025 billion, the Pennsylvania Public School Employees Retirement System allocated $3.22 billion, and the Maryland Retirement and Pensions System shipped $3.05 billion to Chinese investments.
But with scores of state and local public pension funds facing billions of dollars in unfunded liabilities, officials might be desperate to pursue every avenue that could plug their gaping holes.
A recent Truth in Accounting study, “Financial State of Cities,” found that pension debt at the local level totaled nearly $176 billion and that post-employed benefits, particularly health care, exceeded $135 billion.
It’s not only public pension funds that have diversified into China. A broad array of universities and nonprofit organizations have committed funds to Beijing.
The University of Michigan, for example, maintains an endowment that has invested $1.6 billion “across 83 investments.” The University of Texas has put $1.6 billion into 29 investments in China. The University of California invested $1.5 billion in nearly two dozen investments.
Of the notable foundations with sizable investments in Chinese-related private funds, the MacArthur Foundation, the Carnegie Foundation, and the Andrew W. Mellon Foundation were some of the names to crack the list.
“The U.S. tax code gives special privileges to encourage wealthy individuals and entities to maintain generous giving preferences and risk-taking in return for shielding wealth under legal tax status exemptions,” the report reads. “Many of these benevolent institutions’ investment decisions have been unprincipled, betraying our country’s interest by investing in countries of concern like China.”
White House Restrictions
This past summer, the current administration issued an executive order prohibiting investment in specific Chinese sectors, particularly its technology industry, which involves artificial intelligence, semiconductors, and quantum computing.The Treasury Department noted that this rulemaking was designed to protect U.S. national security.
“The United States benefits from an open investment climate and this new program will not change that. It is narrowly targeted at investments in highly sensitive technologies and products for the purposes of protecting U.S. national security,” the Treasury said in a statement. “Treasury anticipates excepting certain transactions, including potentially those in publicly traded instruments and intracompany transfers from U.S. parents to subsidiaries.”
President Joe Biden’s measure is another development in the U.S.–China saga. While the White House insists that it intends to maintain a partnership with Beijing, the administration’s message is that U.S. capital and expertise can’t help China boost its military capabilities.
Market observers and policymakers argue that these efforts don’t extend far enough.
China and the WTO
The House Select Committee on the Chinese Communist Party published a report that states that China’s economic model is “incompatible” with the World Trade Organization (WTO). As a result, the bipartisan report recommended an end to U.S. private equity investments in China, along with accelerated divestments.
“If this cannot be achieved within the confines of the WTO, then a new multilateral effort by like-minded market economies that goes back to first principles is needed,” the report reads. “Because the [People’s Republic of China’s] state-led economic system is antithetical to the founding principles of the WTO, actions to defend the United States and global economy against PRC economic aggression are consistent with the U.S. commitment to a multilateral trading system based on market-oriented principles.”
It has been more than two decades since China was admitted into the WTO. At first, it was believed that Beijing would maintain and expand its market-oriented reforms. However, Chinese officials have mostly abandoned market principles and abused the WTO system by blocking attempts to alter the international body’s rules that would, in theory, target China.
U.S. officials have said that they are working diligently to press institutions such as the WTO to impose reforms.
Appearing at a recent Council on Foreign Relations event, U.S. Trade Representative Katherine Tai revealed that she and her colleagues continue to promote reform campaigns inside the WTO.
“This is the one institutional reform that is squarely on the agenda and where we are grappling with the questions of reform extremely robustly,” Ms. Tai said. “We’re having very honest and difficult conversations, and I think by that measure, the reinforcement is how important the WTO is.”
These comments come as the WTO will hold a Feb. 26–29 ministerial meeting in the capital city of Abu Dhabi, United Arab Emirates. A few of the chief subjects heading into the much-anticipated meeting will be brokering reforms, tackling the issue of fishing, working on digital trade, and easing domestic support of the agricultural sector.
