The coronavirus crisis has revealed the severe supply-chain risks inherent in tying the U.S. economy to China. But a potentially even bigger problem is Wall Street indexes and related funds drastically increasing their stakes in opaque and often criminal Chinese companies, without disclosing the risks to millions of American investors.

Senior U.S. officials, lawmakers and experts are sounding the alarm about huge pension funds increasing their holdings of Chinese assets, despite economic and national security concerns. The retirement savings of millions of U.S. investors are becoming dependent on the success of Chinese companies that lack real transparency, are connected to the Chinese military or stand accused of complicity in mass atrocities.

Beijing pushes Wall Street to fund its firms, enlisting U.S. citizens in support of China’s economic aggression. And when national security officials speak out, they are accused of racism, a common Chinese government tactic to reject any criticism.

Robert C. O’Brien, the national security adviser, weighed in Wednesday on the controversy surrounding the California Public Employees’ Retirement System, known as CalPERS. The largest public pension fund in the country, CalPERS manages more than $300 billion in assets for 1.6 million public employees. It has steadily been increasing its holding of Chinese assets.

“It’s something we are looking at. It’s an issue for American investors,” O’Brien said at the Heritage Foundation in Washington. “Some of the CalPERS investment policies are incredibly concerning.”

O’Brien pointed out that Chinese companies’ books can’t be verified — and they are notorious for cooking their books — so the risks to investors can’t be known. He also noted CalPERS is directing U.S. taxpayers’ dollars into companies connected to the military expansion of an adversary.

“I don’t see why we should be underwriting the Chinese defense industry,” he said.

CalPERS holds $3.1 billion worth of shares in 172 different Chinese companies and last fall rebalanced its portfolio to add 198 companies, half based in China. Their holdings include Chinese military contractors such as China Shipbuilding Industry Corp. and companies currently sanctioned by the Commerce Department for building surveillance and internment camps in Xinjiang, such as Hikvision.

The economic and national security concerns are linked. U.S. pressure on Chinese bad actors is undermined when Wall Street sends them billions in cash. In turn, the more Wall Street is invested in Chinese bad actors, the more they lobby against Washington’s actions, to Beijing’s benefit.

Ben Meng, CalPERS’s chief investment officer and a U.S. citizen who grew up in China, once was connected to a Chinese Communist Party recruitment effort called the Thousand Talents Program. The FBI has said Beijing uses this program for nontraditional espionage. The Senate Permanent Select Committee on Investigations revealed in a recent report several instances of the program being used for criminal abuses of U.S. institutions of all kinds.

China’s People’s Daily reported in 2017 that Meng was recruited through the Thousand Talents Program for his three-year stint as deputy CIO for China’s State Administration of Foreign Exchange (SAFE). Rep. Jim Banks (R-Ind.) called on California Gov. Gavin Newsom (D) to fire Meng, based on the association.

Meng eventually admitted his past connection to Thousand Talents last month, while CalPERS and several Wall Street heavyweights attacked Banks. Oaktree Capital founder Howard Marks accused Banks of singling out Meng "on the basis of [his] family’s national origin.” CalPERS is a client of Oaktree.

Scrutiny of Thousand Talents is not targeted at ethnically Chinese participants. The H. Lee Moffitt Cancer Center and Research Institute fired its non-Chinese CEO and vice president in December for not disclosing their participation in Thousand Talents. The chairman of Harvard University’s chemistry department — also not ethnically Chinese — was criminally charged in January for hiding his Thousand Talents connections while taking Defense Department money.

CalPERS’s main defense is that it increased its holdings of Chinese assets because it tracks two major Wall Street indexes to make investment decisions, the FTSE Russell Index and MSCI. Both drastically increased their holdings of Chinese assets last year and continue to do so. MSCI was directly pressured on this by Beijing.

But as experts have pointed out, CalPERS doesn’t track them 100 percent and, in fact, has its own formula for investments. They could choose to not take on added risk of Chinese investments if they wanted to.

“CalPERS and other state public pension systems should properly take direct responsibility for U.S.-sanctioned and other Chinese bad actors ending up in their investment portfolios and not try to simply offload blame onto the index providers,” said Roger Robinson, president of RWR Advisory Group, a Washington-based research and risk consultancy.

This is not a “red scare” or an argument for complete decoupling of the U.S. economy from China. This is a call for more transparency from Chinese companies and more vigilance by U.S. institutions gambling with Americans’ financial futures.

China wants to see its most controversial firms embedded in U.S. indexes and pension funds because it legitimizes these companies, undermines U.S. sanctions and advances Beijing’s strategy to increase China’s leverage and influence over the United States. We can’t afford to let that happen.

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