China flag. Flag with a beautiful glossy silk texture.

Almost every American is aware of the trade dispute between America and China. President Trump has levied tariffs on Chinese imports in an effort to bring China to the bargaining table to negotiate a new trade deal. Intellectual property theft has been a major issue that lead to the U.S. House of Representatives barring the U.S. government from buying gear from China’s Huawei, the leader in telecom supplies and the number 1 phone manufacturer. What is not discussed by the media or the Trump administration are the tens of millions of American pensions invested in Chinese companies. Some of these companies are tied to the Peoples Liberation Army (PLA) of China, which was founded by the Communist Party of China. This connection would make those companies state run companies listed in our capital markets. Seven companies as of October have been blacklisted by the Trump administration for human rights abuses. One such company, Hikvision, is blacklisted for its role of providing surveillance cameras for the concentration camps that detain millions of Uyghur Muslims in the Xinjiang region. Other companies, such as the largest dredging operation, the China Communications Construction Company, are responsible for the highly controversial building of the man-made islands in the South Chinese sea.

Beijing’s National Intelligence Law

According to CEO and president of the risk management company RWR Advisory Group, Roger Robinson, over 650 Chinese enterprises are listed in U.S. capital markets. 86 such companies are listed on the New York Stock Exchange (NYSE), and 62 on NASDAQ, and over 500 on the less regulated and most popular “over the counter” markets. Most concerning, other than the fact American investors are unwittingly financing these companies, is the threat they pose to U.S. national security. Beijing’s National Intelligence Law mandates that Chinese companies give access and support Beijing’s intelligence services. At the will of the Chinese government this access and support can extend to foreign citizens, companies, organizations, and even students studying in America. As you can imagine, creators of surveillance technology such as Hikvision, and defense contractors are focal points of Beijing and a direct threat to U.S. national security. Listed on the NYSE is China Unicom. China Unicom is a PLA contractor that provides telecommunications and signal intelligence facilities to the Chinese military in the South China Sea. They are also the single internet provider to North Korea. To illustrate the threat that China Unicom is to national security, China Unicom provided the PLA with the technology that allowed APT1  to hack into the systems of hundreds of American companies to steal trade secrets and other intellectual property. So the next time an American entity is hacked and we are told “China did it”, you may consider China Unicom being behind the technology that enabled the hacking. Flytek Co. Ltd. is one of the previously mentioned blacklisted companies and they provide speech recognition technology. Aviation Industry Corporation of China (AVIC), is one of multiple companies which poses a risk to U.S. military. Iran was provided with its new ground-based anti-ship cruise missiles which can be used against American naval forces in the 6th Fleet by AVIC. Surprisingly, AVIC has been sanctioned many times but has never been delisted from U.S. capital markets. China Shipbuilding is a company name that sounds innocent on its face but, it builds guided missile destroyers, and nuclear ballistic missile submarines. Submarines that could be used to target American cities in time of war.

Trojan Horses

One of the Trojan horses by which Chinese companies gain access to U.S. capital markets is Morgan Stanley Capital International (MSCI). MSCI Inc. provides products for global investors, and in 2018 named Hikvision an “emerging markets index”. In particular, MSCI provides multi-asset portfolio analysis, hedge fund stock market indexes, equity, and fixed income. Morgan Stanley, in 1986, licensed the indexes rights from Capital International which from its inception in 1968 published indexes covering the global stock market for non-U.S. markets. I use the term Trojan horse because, once a Chinese company is added to an index fund managed by MSCI, automatically the funds in that index buys stocks in the particular Chinese firm. Make no mistake, MSCI is not the only index manager that companies from China finds their way into the U.S. capital markets. What’s troubling is the fact that none of the market managers expose the dark side of the Chinese companies in their risk assessments section. Nor can the Public Company Accounting Oversight Board (PCAOB), which is a nonprofit organization that oversees audits of public companies, conduct audits of Chinese public companies. China claims such audits would risk exposing the equivalent of trade secrets. The SEC oversees the PCAOB, and here we have a case where the SEC treats public companies from China differently than they treat U.S. public companies and other international public companies in our capital markets. Material risk to share value and corporate reputation are supposed to be disclosed when a company goes public. When this is not done the SEC labels it a material omission which is illegal. But Chinese firms get away with it. Until the SEC is confronted about the human rights abuses and risks to national security that such companies commit and pose, China and its public companies may never be held accountable.

Culprits and Those Cutting Ties

While this article is about the issue of public pension funds owning shares of China corporations that pose national security and commit human rights violations, for illustration purposes it is worth noting a couple of the public pension funds. Tens of millions of retired American pensions are invested in these Chinese companies. The New York State Teachers Retirement fund owned 81,802 shares at the end of June 2019 which was an increase from 26,402 shares at the end of 2018. California State Retirement System owns 4.35 million shares of Hikvision. At the time of June 30,2018 those shares were worth $24 million. It is also worth noting that some pension funds have sold their shares in these companies. At one time owning 2.7 million shares worth $14.2 million, the New York State Common Fund sold their shares in Hikvision in May. Due to a report in May by Human Rights Watch about Xinjiang mass surveillance, U.S. mutual funds sold their shares in Hikvision. Retired Americans and investors should not rely on their fund managers to do the right thing and cut ties with Chinese bad actors. Not only should the hard earned money of Americans not be invested in companies that pose risks to our national security and commit human rights violations, doing so also takes money away from American companies. This is why it is imperative that American investors familiarize themselves with the companies in which they have positions in. Know your money!

James Cheef