Talk of the Trump administration taking action to institute sweeping capital restrictions aimed at cutting off investment flows to China has largely died down, but Marco Rubio is still hell-bent on blocking US government pension funds from investing in Chinese stocks.
Rubio’s name came up early and often late in September when news that the White House was considering a menu of options for restricting capital flows first rippled across markets.
The administration was quick to downplay the reports once it became clear that US equities were in no mood to swallow the prospect of Trump taking unilateral action to, for example, delist Chinese shares from US exchanges or strong-arm index construction decisions.
And yet, even as some of the more extreme ideas under discussion at the White House were summarily dismissed as so potentially disruptive as to be wholly ridiculous, the notion of capping investment via government pension funds has a lot of support on Capitol Hill.
Rubio – who is spearheading the push – was not amused last month when The Federal Retirement Thrift Investment Board delayed a decision on whether to alter plans to have the $50 billion TSP I Fund mimic the MSCI All Country World ex-US Investable Market Index. China is the third-largest country weight in the benchmark, at 7.5%.
The decision to lift government employees’ exposure to Chinese equities was made two years ago, and the debate about whether to stick to it will be taken up again later this month. Rubio is not willing to accept anything less than a total repudiation of the original decision.
Aon Hewitt – which is advising FRTIB – argued that the I Fund is better served (i.e., will produce better returns) by matching ex-US international equity markets. Obviously, avoiding Chinese shares altogether risks becoming woefully detached from the reality of global markets.
But in an effort to turn the tables on that common sense assessment, Rubio and other lawmakers charge that any decision by the FRTIB to increase exposure to China is “short-sighted”. (Again, what’s short-sighted is pretending that somehow China A shares aren’t going to comprise a larger and larger share of the investable global equity universe going forward.)
Ultimately, the argument is based on national security concerns and on the idea that retirees don’t want to “fund communism” – or something.
“Imagine retiring after a long career serving in uniform, only to learn that your savings all those years had helped fund advanced weapons systems for America’s adversaries. This tragedy will soon become reality unless a decision by the Federal Retirement Thrift Investment Board is immediately reversed”, The Secretary of the Navy Richard Spencer wrote, in an October 23 article for the Wall Street Journal.
That is a laughably simplistic way to conceptualize things – as though every dollar invested in a Chinese firm is immediately deposited into a bank account with the PLA and funneled instantly to hypersonic weapons development initiatives.
Still, there are legitimate concerns. Rubio sparred with MSCI itself this year over the index provider’s inclusion of firms which the US has targeted in various efforts to send a message to Beijing over its human rights record.
“It is deeply troubling that a company like Hikvision, which is complicit in China’s human rights abuses in Xinjiang and is on the Commerce Department’s banned Entity List, can get access to the US capital markets through an MSCI index”, Rubio said last month.
Earlier this year, he said “firms like MSCI have an obligation to make sure investors know whether their investment dollars are unwittingly aiding Chinese state-owned and state-directed companies linked to China’s efforts to steal American innovation, undermine fair competition, increase threats to US national security and economic security, and support China’s systemic and egregious human rights abuses”.
It’s not clear whether that latter statement is true. It’s probably true in a normative sense, but whether MSCI is somehow legally obligated to educate investors about each and every possible negative externality associated with investing in emerging market equities in countries not wholly committed to upholding democratic norms is highly questionable. How would that even be enforced? We are, after all, talking about emerging markets. Idiosyncratic country risk (which includes unpredictable politics and brushes with authoritarians) is part of it.
Last month, MSCI basically called bulls–t on Marco. “There is no US law or regulation that prohibits an index company from creating an index containing China A securities or US investors from trading in the China A market”, MSCI’s CEO Henry Fernandez wrote in a letter.
That being the case, Rubio figures he’ll just make one – a law that is. “I will continue to work with my colleagues in a bipartisan fashion to ensure that US investors and pensioners are not at risk”, he snapped, in response to MSCI.
That “work” culminated on Wednesday in a bill aimed at preventing the FRTIB from steering federal retirement savings to China.
“The TSP Act would conditionally ban the investment of Thrift Savings Plan funds in securities listed on mainland Chinese exchanges”, a press release reads. “The TSP Act would stop the FRTIB from moving forward with a short-sighted decision to shift the Thrift Savings Plan’s International Fund Index to the MSCI All Country World ex-US Investable Market Index that includes Chinese companies under US sanctions and US export ban”.
Rubio has several backers for the legislation including at least two big names in Kirsten Gillibrand and Mitt Romney. Mark Meadows is set to introduce a companion bill in the House (assuming he can take a break from tweeting in defense of Trump’s efforts to blackmail foreign governments).
“Today makes clear that a bipartisan, bicameral coalition in Congress will not sit on the sidelines and allow the TSP Board to funnel the federal retirement savings of US service members and federal employees to the Chinese Communist Party”, Rubio said.
Frankly, we have no opinion on this. There’s more than a little merit to Rubio’s concerns, and it wouldn’t be fair to characterize this as merely an extension of the trade war.
Still, Rubio is clearly capitalizing off the prevailing anti-China sentiment fostered by the Trump administration, and it certainly helps that he can point to the Hikvision blacklisting in support of the bill.