Vanguard, the world’s second-largest asset manager, is acting as a pipeline through which US investment dollars are being funnelled into Chinese military companies and corporations sanctioned over human rights abuses, according to a new report by a US producers’ lobby group.
The Coalition for a Prosperous America (CPA), a bipartisan organisation that represents exclusively US-based manufacturers and farmers, said Vanguard’s flagship emerging markets fund was channelling investment into 60 companies within China’s military industrial complex. Some of the companies are subject to US government export controls.
Vanguard funds also have holdings in eight Chinese companies that are sanctioned by the US government over human rights abuses in China’s Xinjiang region, the CPA report said. The US state department has characterised the suppression of the Uyghur minority in Xinjiang as “genocide”.
Wall Street’s role in financing Chinese companies connected to the People’s Liberation Army is becoming increasingly contentious in Washington.
In August, the US House of Representatives China committee accused asset manager BlackRock and global index provider MSCI of facilitating investment that helped the Chinese military. BlackRock said at the time it complied “with all applicable US government laws”. MSCI said it was “reviewing the inquiry” from the lawmakers.
Mike Gallagher, the Republican chair of the House China committee, told the Financial Times that Congress “must turn off the tap of American capital flowing to China” and companies linked with the governing Chinese Communist party.
“Americans do not want firms like Vanguard . . . to invest their retirement savings in companies building the Chinese Communist party’s military and implementing its ongoing genocide against the Uyghur people,” Gallagher said. “If we accept the status quo, we are wilfully fuelling our own destruction.”
China dismisses criticism of its record in Xinjiang, saying last year that UN High Commissioner for Human Rights findings of “serious human rights abuses” in the region were “groundless”.
Vanguard’s $70bn flagship FTSE Emerging Markets ETF is a “passive” exchange-traded fund that seeks to track the performance of an index of listed companies in emerging markets compiled by FTSE Russell.
The CPA report does not allege illegal activities by Vanguard or by FTSE Russell. But it says that America’s “national security, fundamental values, investor protection, and economic wellbeing should always take precedence over short-term profits”.
Vanguard, after being told of the contents of the CPA report, said the asset manager maintained “the highest levels of compliance with all applicable laws and regulations”.
“We continue to monitor developments and would welcome additional clarity from policymakers,” the company added. “As one of many asset managers offering investors a range of funds to invest internationally, our clients’ investments in China are primarily through US-based passive index products that provide diversified exposure to many developed and emerging economies.”
FTSE Russell, which compiles the indices used for many Vanguard funds, said it did not comment on reports it had not read. FTSE Russell dropped eight Chinese military-linked companies from some of its indices in 2020.
Case studies cited in the CPA report highlight Vanguard’s role in channelling US clients’ money into subsidiaries of Aviation Industry Corporation of China (Avic) and Aero Engine Corporation of China, aerospace groups that drive Beijing’s production of advanced fighters and bombers.
Both Avic and AECC are on the US commerce department’s Military End User List, which restricts trade between them and US companies.
US investor capital from Vanguard also funded affiliates of the China State Shipbuilding Corporation, a military-linked conglomerate, the report said. One CSSC subsidiary operated Jiangnan shipyard, where Chinese navy aircraft carriers were built, it said.
“These case studies are both surprising and troubling from an investor protection, national security and human rights perspective,” said Roger Robinson, former chair of the Congressional US-China Economic and Security Review Commission.
In August, US president Joe Biden issued an executive order restricting some investment into China’s quantum computing, advanced semiconductor and artificial intelligence sectors.
Some members of Congress, including Gallagher, have urged the administration to expand the order to include portfolio investment.
But the Biden administration opted for a narrower measure largely aimed at private equity and venture capital firms and at US investors who have joint ventures with Chinese groups.
Alma Angotti, lead for global regulatory risk at the consultancy Guidehouse, said asset managers were being put in a “difficult position”, even though their funds were “probably very strictly in compliance” with the US Treasury’s Office of Foreign Assets Control.
Angotti said Ofac was likely to expand its list of banned investments to include the debt and equity of companies already named in other government blacklists.
Such a move could be taken “very quickly”, she said, since it would only require an executive order.
Early in the Biden administration, the US banned Americans from investing in the equity and debt of dozens of other Chinese defence and surveillance technology companies.
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