BlackRock and MSCI Under Scrutiny for Investments in Blacklisted Chinese Companies

The Lede: On Tuesday the U.S. Select Committee announced that it sent separate letters to MSCI and BlackRock inquiring about the two firms’ facilitation of U.S. investments into a number of Chinese companies blacklisted for security and human rights concerns.

What We Know:

• The U.S. Select Committee on the Chinese Communist Party of the U.S. House of Representatives sent letters to BlackRock CEO Larry Fink and MSCI CEO Henry Fernandez on Monday notifying both companies that it is investigating their investments in Chinese companies that have been blacklisted under U.S. law. The Chinese firms in question are in sensitive industries such as aerospace, cybersecurity, semiconductors, nuclear power, telecommunications, construction, and marine engineering.
• The Committee found that BlackRock had invested more than $429 million across five funds into Chinese companies flagged for business activities that run counter to U.S. interests as well as at least 40 companies listed on the MSCI indexes that are designated on governmental red-flag lists. The flagged companies make up nearly 5% of the MSCI China A Index’s value as of March 1.
• The Committee has asked both firms to answer a series of questions about their investments in the Chinese companies in question by August 14.

The Background: BlackRock is the world’s largest asset manager and has over $9 trillion under management. Millions of Americans invest their retirement savings in the firm’s funds. MSCI is one of the biggest providers of index funds and has over $13 trillion in its products. Recently, the U.S. has been ramping up scrutiny of financial ties and investments in China. In the last weeks, the Committee launched an inquiry to the Ford Motor Company regarding the company’s ties to a battery company in China due to forced labor and job offshoring concerns. The Committee also sent letters last month to four U.S. venture capital firms regarding their investments into Chinese artificial intelligence, semiconductor and quantum computing companies. The Biden administration has unveiled sets of export controls barring the trade of advanced chips and chip-making equipment without a license.

Likely Outcomes:

• It remains to be seen whether the Committee delivers subpoenas regarding these inquiries. The two firms have deeply invested in China in the last decade or so across numerous industries. With Washington’s increased tightetning of trade and investment with the Asian superpower, the paths of policy and business were bound to intersect. BlackRock and MSCI will likely change their portfolio allocations to fit in the boundaries of tightening U.S. laws and regulations. The two firms and other investment entities in the U.S. may also look forward in their investment strategies to anticipate further measures from Washington that will affect their outlook and avoid the risks.
• There may be a significant shift in the investment and retirement accounts of Americans who have large holdings with these and similar firms through their large funds. The big bet on China’s economic growth as an investment strategy now encounters the geopolitical risk of the U.S.-China rivalry and flows will continue to shift away and diversify into other markets. This may include alternative international and emerging markets as well as opportunities in the U.S. domestic market.  

Quotables:

“Our review has shown that, as a direct result of decisions made by MSCI, these Americans are now unwittingly funding PRC companies that develop and build weapons for the People’s Liberation Army (PLA)—the PRC’s military—and advance the CCP’s stated mission of technological supremacy.” - Mike Gallagher, Republican Representative from Wisconsin and chair of the House Select Committee on the Chinese Communist Party

“In the law that created the committee we were given subpoena authority for a reason, which is to do our investigation and our oversight in a thorough and robust yet fair fashion…Our hope is that we will get a cooperative and fulsome response from BlackRock and MSCI, and I think our goal is for that response to inform policy and legislation, particularly as we debate this question of guardrails on outbound capital flows” - Mike Gallagher, Republican Representative from Wisconsin and chair of the House Select Committee on the Chinese Communist Party

“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.” - BlackRock statement to CNN

"They're not just run of the mill companies. We're talking about companies that build the J-20 fighter jet, artillery shells for the PLA, they develop software to surveil Uyghurs." - Raja Krishnamoorthi, Democratic Representative from Illinois and member of the House Select Committee on the Chinese Communist Party

Good Reads:

U.S. House committee flags MSCI, BlackRock for China investments (CNBC)

Americans are ‘unwittingly funding’ blacklisted Chinese companies, Congressional panel says (CNN)

Subpoenas possible for BlackRock, MSCI over China investments, US House panel chair says (Reuters)