U.S. Investors Are Funding Malign PRC Companies on Major Indices

"Under Xi Jinping, the CCP has prioritized something called 'military-civil fusion.' … Under Chinese law, Chinese companies and researchers must - under penalty of law - share technology with the Chinese military. The goal is to ensure that the People's Liberation Army has military dominance. And the PLA's core mission is to sustain the Chinese Communist Party's grip on power."

- Secretary of State Michael R. Pompeo, January 11, 2020

The Chinese Communist Party's threat to American national security extends into our financial markets and impacts American investors. Many major stock and bond indices developed by index providers like MSCI and FTSE include malign People's Republic of China (PRC) companies, listed on the Department of Commerce Entity List and/or the Department of Defense List of "Communist Chinese military companies." The money flowing into these index funds - often passively, by U.S. retail investors - supports Chinese companies involved in both civilian and military production. Some of these companies produce technologies for the surveillance of civilians and repression of human rights, as is the case of Uyghurs and other Muslim minority groups in Xinjiang, China, as well as in other repressive regimes, such as Iran and Venezuela.

As of June 2020, at least 22 of the 31 parent-level PRC military companies had affiliates' securities included on a major securities index, including at least 68 distinct affiliate-level securities issuers; at least 13 PRC firms on the Entity List had affiliates or parent companies included in the MSCI or FTSE stock indices; and the MSCI emerging market index included 230 A-shares Chinese stocks incorporated on the mainland, quoted in renminbi, and listed on Chinese Communist Party-controlled Shanghai and Shenzhen exchanges.

PRC Military Companies on MSCI and FTSE

"Some of the Chinese companies (on MSCI Index) present significant national security and humanitarian concerns for the United States which increases the risk that they could be subject to sanctions, public protests, trade restrictions, boycotts, and other punitive measures that jeopardize their business and profitability. For example, military contractors that provide military aircraft and telecommunications support to the People's Liberation Army. The list also includes companies that manufacture surveillance equipment that China uses to oppress religious minorities as well as one company indicted for engaging in economic activity with Iran and North Korea in violation of U.S. sanctions law."

- Robert C. O'Brien, National Security Advisor, and Lawrence Kudlow, Director, National Economic Council, May 11, 2020

Parent-Level PRC Military Companies with Affiliates' Securities Included on Major Indices

Affiliate-Level PRC Military Company Stocks Included on Major Indices

PRC Entity List Companies on MSCI and FTSE

Thirteen PRC firms placed on the Department of Commerce Entity List for provision of equipment used to violate Uyghur human rights in Xinjiang, among other reasons, are affiliated with nine distinct publicly traded PRC firms that are included on the MSCI and/or FTSE stock indices. Hangzhou Hikvision, IFLTEK, Fiberhome, and Dahua are prominent examples of PRC firms with widely recognized ties to the oppression of Uyghurs that benefit from inclusion in the MSCI and/or FTSE stock indices.

PRC Entity List Companies on the New York Stock Exchange (NYSE)

• China Telecommunications Corp.
• China Mobile Communications Group

Both companies are considered PRC military companies by the Department of Defense.

PRC stocks directly affect the pension assets of American workers and retirees

• There are 3,992 public pension systems in the United States, according to the United States Census Bureau.
• 231 of these public pension systems are state-level programs, while the remaining 3,761 are local.
• $10.7 trillion invested in the private pension plans is covered by the Employee Retirement Income Security Act (ERISA).

The Thrift Savings Plan's governing board study revealed that a majority of pension funds use the MSCI emerging market index as their investment guide, including:

• The 401k's of all 10 largest publicly traded U.S. companies, including firms like Apple and Microsoft
• All 10 of the top federal contractors
• All 20 of the largest state pension plans
• All six of the largest target-date mutual-fund providers
• The Pension Benefit Guaranty Corporation (PBGC)
  • ($133 billion in pension insurance reserves)
• Numerous Insurance Funds
• Numerous University and College Endowment Funds

Institutional investors and endowment managers can and should pay attention to these risks

"Under Secretary Krach sent a letter recently to the governing boards of American universities, alerting them to the threats the Chinese Communist Party poses to academic freedom, to human rights, and to university endowments. These threats can come in the form of illicit funding for research, intellectual property theft, intimidation of foreign students, and opaque talent recruitment efforts.

"University governing boards can help ensure their institutions have clean investments and clean endowment funds by taking a few key steps:

• Disclose all PRC companies invested in endowment funds, especially those in emerging-market index funds.
• Divest from Chinese companies on the Commerce Department Entity List that are contributing to human rights violations, military coercion, and other abuses.
• And simply understand the recommendations issued by the President's Working Group on Financial Markets, which examined the risk to investors of Chinese companies that are listed on U.S. stock exchanges."

- Secretary of State Michael R. Pompeo, September 2, 2020

Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies: https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-securities-investments-finance-communist-chinese-military-companies/

Letter from Under Secretary of State Keith Krach to Business Leaders on Xinjiang Supply Chain Business Advisory urging financial institutions' boards to divest from companies that contribute to human rights violations: https://www.state.gov/Letter+from+Under+Secretary+of+State+Keith+Krach+to+Business+Leaders+on+Xinjiang+Supply+Chain+Business+Advisory

Letter From Under Secretary Keith Krach to the Governing Boards of American Universities urging endowment funds to divest from companies that are on the Entity List or that contribute to human rights violations:

https://www.state.gov/letter-from-under-secretary-keith-krach-to-the-governing-boards-of-american-universities