Krach Says Colleges ‘Appreciative’ of China Divestment Warning
Kevin Cirilli: You sent a letter to the colleges and universities urging them to be on guard against the Communist Party of China’s influence on college and university campuses across the country. You also said that they would be, “prudent to divest from their financial endowments that are entangled with Chinese investments.” What’s the response and the reaction been to the State Department from the colleges and universities?
Keith Krach: By the way, the response has been really appreciative, Kevin. And I was chairman of the board of trustees at at Purdue. So it’s talking to my fellow colleagues. And I sent it to the to the board of trustees or the board of governors. Depends what university you’re at. The presidents are getting them as well. And it was about the threat of authoritarianism from the Chinese Communist Party to academic freedom, to honoring human rights. Also in terms of protecting their endowments. And the fourth one is really safeguarding their intellectual property.
Kevin Cirilli: You know, a Bloomberg investigation in 2019 found that Chinese companies were raking in hundreds of millions of dollars in terms of the entanglements between the endowments as well as the Communist Party as well as Chinese companies. I’m wondering if this is just a directive or if this is a warning to these universities about action, either executive or legislative, that might be coming in the short term.
Keith Krach: It’s really a heads up, and I think that’s why they were really appreciative, because I can tell you, most of these boards of trustees — I didn’t know, back when I was the chairman at Purdue — that their endowment funds are invested in many, many Chinese companies. And it may be done through venture capital firms. It may be with the companies listed on the American exchanges. It might be with the ones listed on Chinese exchange, or it might be through an emerging index fund.
And as you know, the president’s financial working group announced that, “Hey, by the end of next year, these Chinese companies have to do something equivalent to Sarbanes-Oxley and they have to have their books audited.” So they have to be as transparent as all the other companies on the exchanges. And that’s really key because right now the risk is huge for the American, the average American investors, and it also creates an unlevel playing field for the companies.
Kevin Cirilli: You mentioned Sarbanes Oxley and of course, just a couple of months ago, this was something that you and I had talked about in a previous interview. And since then, the Senate has passed with unanimous consent, legislation that would require for Chinese firms that are listed on the U.S. exchanges, to follow and comply with Sarbanes-Oxley. Is the president supportive of that? And is that likely going to be taken up in the House?
Well, you know, I think that when you see the results of this recommendation from president’s working group, in essence, that what they said. You have to be transparent or you have to delist. And you know these companies are forced to delist. They have one other choice, and that is to get their books audited. And, you know, there’s probably a high likelihood they have to restate their financials. And as you know, a guy who’s taken three companies public, man, I’ll tell you, if you have to restate your financials, that would be the time you’d want to go under the desk in the fetal position.
Kevin Cirilli: That’s about 200 companies that this could impact, that are publicly traded. Are you nervous about the impact that that could have on American investors who are already, many of them, in the middle class, facing significant economic uncertainty?
Keith Krach: Well, by the way, I think that’s why really the heads up and by the way, it doesn’t end at the university endowments. If you think of the state pension funds — I mean, if you think, for example, the mother of state pension funds, CalPERS, about a five hundred billion dollar fund, they have tens of millions of dollars. They might even have over one hundred million dollars invested in Chinese companies. And as you know, their chief investment officer just was asked to leave. But the citizens don’t know that. And I mean, the fireman’s funds, the teacher’s funds.
And I think not only has the president done a great job of waking up the world on this, but also Congress. You can see this is one of the most unifying, passionate bipartisan issues, is this threat from China and whether it’s in the universities, the pension funds, wherever it may be. And last Thursday, that’s why we announced that Confucius Centers, we now have deemed as a foreign mission run by a foreign country. And so that’s really to shine the light on it. And this really has to do with our transparency campaign that we’re doing with Xinjiang, Hong Kong, so it’s important.
Kevin Cirilli: I want to follow follow up on this notion of a state pension funds, because at a time when so many states are hurting economically and financially, and at the same time their pension funds are invested in many cases, are entangled with Beijing, for example. How do states how do states untangle that out of respect for the national security concerns, but also to make sure that the average American worker isn’t going to suffer or lose benefits, again, at a time when they’re already hurting.
Keith Krach: And by the way, that is the point to what the president’s working group did, because if you look at, for example, the example of Luckin coffee. So what they were doing is they were cooking their books. We couldn’t audit them. The stock dropped. I think investors lost over hundreds of millions of dollars. And, by the way, there’s probably a lot of other companies out there, because if you’re not audited, you can you can hide subsidized revenue. You can hide bribes.
You can make your earnings at the end of the quarter. No problem. You can count subscription. You can count one time revenue as subscription revenue, which will crank up your multiple. So there’s so many things that you can do.
And for the sake of the United States’ exchanges being the gold standard of the world, this is this is a long overdue move.
Kevin Cirilli: And a small business can’t cook their books to the IRS.
Keith Krach: They can’t. They can’t cook their books to the IRS. And by the way, when you’re a public company, I mean, I’ve taken three companies public. I mean, when you’ve got to do for Sarbanes-Oxley not only costs a lot of money, but you’ve got to have your best talent. And it’s got to be super clean. So these clean investments in these clean funds and these clean stock exchanges are really key to upholding the gold standard of our financial system in the United States.
Kevin Cirilli: Final question for you. What’s next in terms of the process here on this particular issue? What’s coming down the pipeline in the short term?
Keith Krach: Well, we’ll see what will come. That’s totally the president’s decision. But I think one of the things in terms of the universities, here’s an interesting thing.
So the College Democrats and the College Republicans got together and they signed a joint letter about the threat from the Chinese Communist Party.
Kevin Cirilli: The kids agree.
Keith Krach: The kids agree.
Kevin Cirilli: We’re going to have to leave it there. Mr. Under Secretary, thank you so much for your time.