On Wednesday, China fired medium-range missiles into the South China Sea, a defense of China’s illegal militarization of artificial islands in disputed territory and a provocation aimed at the U.S. Navy. Millions of Americans likely don’t realize they are personally invested in the Chinese state-owned company that built those islands — as well as scores of other Chinese companies that are bolstering Beijing’s expansion and aggression.
That company, the China Communications Construction Company (CCCC), was sanctioned Wednesday by the State and Commerce departments, along with five subsidiaries and 18 other Chinese entities. U.S. firms and individuals are now banned from working with these companies, and their executives are banned from getting U.S. visas. But these companies can still raise billions from U.S. capital markets, with the help of Wall Street firms that are funneling them cash with complete disregard for the risks to U.S. investors.
Although CCCC and its subsidiaries are listed on the Hong Kong and Shanghai stock exchanges, they raise money from U.S. capital markets because they are listed by major Wall Street index providers such as MSCI and FTSE Russell, whose indexes are tracked by pension funds, university endowments and other large institutional investors. These index providers have been drastically increasing their holdings of Chinese companies, including CCCC, directing billions of U.S. dollars into their coffers each year.
“Scores of millions of average American investors are unwittingly helping fund CCCC and other Chinese state-owned giants through their stock and bond index funds, pension funds and other investment vehicles that Wall Street fund managers and others are mainlining into their investment portfolios,” said Roger W. Robinson Jr., president and chief executive of RWR Advisory Group, a D.C.-based research and risk management consultancy.
CCCC is not only building islands in the South China Sea. The company is also central to Beijing’s worldwide Belt and Road initiative, which offers developing countries huge infrastructure projects that often come saddled with corruption, excessive debt, environmental destruction and forced labor practices. There have been documented abuses by CCCC in several countries, including Tanzania, Kenya and Sri Lanka. The company is also deeply intertwined with the People’s Liberation Army (PLA). It has a Military-Civil Fusion Office, and its subsidiaries build everything from PLA Navy ships to military telecommunications networks to military training facilities.
Last month, Assistant Secretary of State David Stilwell called CCCC and other Chinese state-owned enterprises People’s Republic of China “instruments of abuse” and “modern-day equivalents of the East India Company,” the British colonialist firm of the 18th and 19th centuries.
Some Trump administration officials have tried to warn large U.S. institutions, such as universities, that their holdings of Chinese companies are bad for them as well as bad for the country.
“The boards of your institution’s endowment funds have a moral obligation, and perhaps even a fiduciary duty, to ensure that your institution has clean investments and clean endowment funds,” Undersecretary of State Keith Krach wrote in an Aug. 18 letter to the Governing Boards of American Universities. “I urge you to divest from companies that are on the Entity List or that contribute to human rights violations.”
Several MSCI and FTSE Russell indexes include CCCC or its subsidiaries. Therefore, if the value of CCCC stock goes down because of U.S. sanctions, millions of American investors will take a hit. Beijing has pressured these indexes to take on this risk because it gives Wall Street a huge stake in the success of Chinese firms that are working against the United States.
Where investment in Chinese firms goes, corruption often follows. Ben Meng, the chief executive of the largest state pension fund in the United States, CalPERS, resigned this month days after allegations surfaced that he failed to disclose personal investments in Chinese companies he was simultaneously steering billions of dollars of California pension money to. Meng was part of a Chinese Communist Party talent recruitment effort called the Thousand Talents program.
In June, President Trump resurrected a Presidential Working Group on Financial Markets to examine these issues. But its report, issued this month, deals only with U.S. stock exchanges and barely mentions index providers. Moreover, its remedies for cleaning up the U.S. stock exchanges are full of loopholes Beijing will surely exploit.
Some will argue that cutting off Chinese companies from U.S. capital markets is a drastic step that will increase bilateral tensions, push businesses toward competing markets and disadvantage U.S. investors who want to make money from investing in Chinese firms. But as long as China uses its state-controlled enterprises to spread misery, expand militarily and otherwise act criminally, the U.S. government will be compelled to punish them, regardless of whether U.S. investors suffer.
Wall Street must cease steering billions of U.S. dollars to Chinese state-owned firms committing bad acts. We may not be able to stop China from militarizing the South China Sea. But, at the very least, we should stop forcing Americans to pay for it.