A committee of the US House of Representatives has accused BlackRock and MSCI of profiting from investments that help the Chinese military and undermine American security.
In letters to BlackRock’s CEO, Larry Fink, and MSCI’s CEO, Henry Fernández, the top Republican and Democrat on the panel said the groups’ decisions meant American investors in their funds were “unwittingly funding” Chinese companies that develop weapons for the People’s Liberation Army and violate human rights.
US House: Select Committee on China
The Select Committee on China does not have lawmaking authority, but it has subpoena powers and generally has bipartisan support for its initiatives. The goal of the investigation is to gather facts that would help create better China policies, including on US-originated capital flows.
The committee reflects the executive and legislative branches’ thinking that the US should increasingly target the role of US companies and financial institutions in fueling the rise of a nation increasingly threatening its security interests and that of its allies.
“It is unconscionable for any US company to profit from investments that fuel the military advancement of America’s foremost foreign adversary and facilitate human rights abuses.”
US Reps, Mike Gallaher (R-WI) and Raja Krishnamoorthi (D-IL)
With this latest action involving scrutinizing asset managers and index compilers, legislators are acknowledging that while such firms typically have little or no direct involvement with the Chinese companies in their portfolios or indexes, they play a crucial role in moving large sums of Americans’ retirement savings into their coffers.
The panel said its review has shown that, “as a direct result of decisions” made by BlackRock and MSCI, Americans have been “unwittingly funding” an array of Chinese companies that operate against the interests of the US.
“It is unconscionable for any US company to profit from investments that fuel the military advancement of America’s foremost foreign adversary and facilitate human rights abuses,” the Republican chair Mike Gallagher and top Democrat Raja Krishnamoorthi wrote.
Homeland security
The committee, in its letters, called out BlackRock and MSCI for including in its funds or indexes companies featured on various US government “red flag lists,” such as a Pentagon list of Chinese companies operating in the US that help China’s military and a Department of Homeland Security list of entities involved in human-rights abuses in China’s Xinjiang region.
The committee asked each firm to make an accounting of the Chinese entities it is investing in or including on indexes, and report any due diligence it performs before doing so.
Last week, the US Senate proposed legislation that would require US companies and investors to notify the US government in advance of investments in certain sensitive technology businesses in “countries of concern”.
In a statement to CNN, BlackRock said: “The majority of our clients’ investments in China are through index funds, and we are one of 16 asset managers currently offering US index funds investing in Chinese companies. With all investments in China and markets around the world, BlackRock complies with all applicable US government laws. We will continue engaging with the Select Committee directly on the issues raised.”
MSCI told CNN that it complies with all US laws and is currently reviewing the committee’s request for information.
Sensitive technology investments
On a related note, the US Senate last week proposed legislation that, if also approved by the US House, would require US companies and investors to notify the US government in advance of investments in certain sensitive technology businesses in “countries of concern,” including China and Russia.
To be sure, the pending legislation would only require notification of certain investments and not actually impose on outgoing US investment to such countries, but President Biden is reportedly considering an executive order that would restrict US investors’ ability to invest in specific technologies that have national security implications.
The outbound investment notification regime was added to the National Defense Authorization Act (NDAA) by amendment and approved by a Senate vote on July 25 by an overwhelming 91-6 count.
It would require a US investor to notify the US Treasury Department at least 14 days before undertaking a “covered activity,” meaning certain outbound investments in entities operating in “covered sectors” and located in “countries of concern.”
Those countries are defined to include China, Iran, North Korea and the Russian Federation.
Prior legislative efforts
The new probe into BlackRock and MSCI comes on the heels of an investigation launched last month by the same committee into the investment activities of American venture capital firms GGV Capital, GSR Ventures, Walden International and Qualcomm Ventures for investing in Chinese artificial intelligence and semiconductor companies.
And various versions of an outbound investment regime have been introduced in the US Congress, such as the National Critical Capabilities Defense Act (NCCDA), initially proposed as part of other legislation in 2021 and revised in 2022.
The NCCDA would have established a Committee on National Critical Capabilities to screen investments in countries of concern involving a “national critical capability,” which would have included sectors such as semiconductors, artificial intelligence, defense, aerospace, medical, and associated supply chains.
While not enacted, the NCCDA seemingly paved the way for the current US Senate action.