As we navigate the escalating threat posed by China – a nation guided by communist doctrine, yet peculiarly sustained by the tenets of global capitalism – the urgency to reassess our financial engagement becomes more pressing than ever.
The Chinese Communist Party (CCP), the draconian ruler of the world’s second-largest economy, has accumulated immense wealth from American investments. This wealth manifests itself through dollar-denominated Chinese bonds and a myriad of Chinese companies publicly traded on U.S. exchanges, including their shrewdly named subsidiaries, intricately woven into the fabric of index funds.
In an alarming twist, the Chinese government has weaponized our own capitalist system against us. Through 401(k) retirement accounts and diverse investment vehicles, approximately 100 million Americans are unknowingly bolstering a predatory economic adversary and facilitating a military with global supremacy ambitions.
The recent aftershocks from Russia’s invasion of Ukraine, prompting more than 1,000 corporations to surrender billions of dollars, underscore the potential havoc a Chinese invasion of Taiwan could wreak. The fallout, especially on retirement security and the high-tech sector (considering Taiwan’s supremacy in semiconductor manufacturing), would be dramatically amplified. It’s therefore unsurprising that seasoned board members worldwide are compelling CEOs to formulate a China risk mitigation plan. They realize this is not a drill.
China’s infiltration of global capital markets is anything but incidental. Since the economic liberalization of 1978, the CCP has systematically targeted Western capital markets. Roger Robinson, the global tech security commissioner for Capital Markets, testified before the House Select Committee on the Chinese Communist Party, confirming that the U.S. has inadvertently facilitated thousands of CCP-controlled Chinese companies to infiltrate the investment portfolios of average Americans. Today, around 5,000 Chinese companies (contributing trillions to Beijing’s coffers over the past decade) are traded on U.S. exchanges.
The CCP heavily depends on foreign investors to uphold its reign, particularly as a looming financial crisis threatens, driven by a crumbling real estate market, a mammoth debt burden, low consumer spending and the stringent “zero-Covid” policy. Without the influx of foreign investment, primarily from U.S. sources (accounting for 60 percent of global dollar liquidity), the Chinese government risks a total economic meltdown.
While leading asset managers like BlackRock pay lip service to responsible investing, a stark inconsistency emerges when applying environmental, social and governance (ESG) standards to China — a nation notorious for pollution, genocide and financial fraud. If BlackRock and others applied the ESG standards with integrity, all Chinese companies would be excluded for three reasons — E, S and G. A recent Wharton case study highlighted that BlackRock’s CEO, Larry Fink, funnels more investment capital into China than any other individual worldwide.
Indeed, many investment firms appear to dismiss the perils of investing in an authoritarian regime, as exemplified by a May 15 note from UBS Global Wealth Management downplaying the import declines and social financing data as “not as bad as they appear.”
Chinese corporate misdeeds are far-reaching, with companies associated with concentration camps, forced labor trafficking, genocide and aiding the development of advanced weaponry for the People’s Liberation Army. Disturbingly, more than 100 million Americans are unwittingly invested in these sanctioned Chinese entities, thus inadvertently emboldening a potent adversary.
The world’s democratic economies are awakening to the risks associated with business ventures in China. At the G7 summit in Japan, they committed to “de-risking and diversifying” to offset China’s predatory tactics and reduce dependencies in critical supply chains.
While these initial steps are laudable, much more must be done. Companies under the dominion of the Chinese government must be delisted and deregistered from U.S. exchanges, including over-the-counter markets, and purged from U.S. indices and investment products pegged to these indices.
Further, investment firms should be barred from holding securities of Chinese corporations that support human rights violations, ally with U.S. adversaries, answer to the Chinese military or neglect corporate governance practices including material risk disclosure and minority shareholder rights.
Also, a prohibition on issuing dollar-denominated Chinese sovereign bonds should also be enforced, preventing the CCP from accumulating billions in annual discretionary cash.
As Americans once faced the threat of the Soviet Union with unflinching resolve and wielded economic measures to quell its threats, we must now marshal similar resolve and decisive action against a formidable adversary that brazenly disregards international rules of fair trade and global conduct. Drawing from our history, a solid stance is not just warranted but required.
We have been spectators for far too long. It is high time we harness our capitalist system – the most potent engine for economic mobility and self-determination the world has ever known – into a force for good.
