Vanguard Fund Found Holding China Shares with Military Ties

KananTM

The Lede: A report from a U.S. producers’ lobby group on Thursday said one of the world's largest fund managers, U.S.-based Vanguard Group, owns shares in Chinese companies that have links to the country’s military or have been sanctioned by Washington for human rights abuses as the U.S. and its Western allies.

What We Know:

According to the report by the Coalition for a Prosperous America (CPA), the $98.7 billion Vanguard FTSE Emerging Markets ETF has invested in the subsidiaries of 60 companies that are part of China's military-industrial complex. It alleges that the fund put money into eight companies that are sanctioned by the U.S. government over potential human rights abuses in Xinjiang province.
The fund's fact sheet shows that the ETF owns more than 2,100 Chinese A-share companies among its 5,757 stocks. The CPA report highlights Vanguard’s investments in companies involved in advanced aircraft technologies and shipbuilders that have ties to the Chinese military. This includes $46 million in three subsidiaries of Aero Engine Corporation of China (AECC), $44 million in 10 companies under the Aviation Industry Corporation of China (AVIC), and funding for affiliates of the China State Shipbuilding Corporation (CSSC), which has a subsidiary that operates the Jiangnan shipyard that builds China’s navy aircraft carriers.

The Background: Vanguard is the world’s second-largest asset manager. Its $70 billion flagship FTSE Emerging Markets ETF is a passive exchange-traded fund that seeks to track the performance of an index of emerging market listed companies arranged by FTSE Russell. Fund manager BlackRock and index maker MSCI were questioned in August by the China committee of the U.S. House of Representatives regarding the possible direction of funds into Chinese companies with relations to the military. Last year, State Street Global Advisors Asia was dropped as the manager of the Hong Kong-listed Tracker Fund after it stopped investing in companies designated with ties to the Chinese military. The CPA represents U.S. manufacturers, workers, farmers, and ranchers.

Likely Outcomes:

Although Vanguard and other Wall Street firms with such investment products insist that they are complying with applicable U.S. government regulations, the breadth of companies that these ETFs and funds hold and the increasingly complex regulatory environment that Washington’s policies have created has made it a virtual certainty that there are some prohibited investments in place. The House China committee or a government agency may start an initiative to pore over China-related investments on Wall Street to root out these ties.
These firms may also assess the risks of investing in China and adjust their blends of fund investments to satisfy both Washington’s policies as well as the sentiment of American investors toward the China market. The U.S. government is likely to expand its list of banned investments as it perceives its competition with China heating up. However, asset managers may front run such policies to avoid any further compliance inquiries.

Quotables:

“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. If we accept the status quo, we are wilfully fuelling our own destruction. Many of these companies are creating weapon systems that may be targeting American service members as we speak. Vanguard is directing Americans' savings to fund our own potential destruction. God forbid there's ever a Taiwan Strait conflict where weapons that Vanguard underwrote are used against American men and women in uniform.” - Mike Gallagher, Republican Congressman from Wisconsin and chair of the House China committee

“These case studies are both surprising and troubling from an investor protection, national security and human rights perspective.” - Roger Robinson, former chair of the Congressional US-China Economic and Security Review Commission

Good Reads:

Vanguard funds invest in China military groups, report says (Financial Times)

Vanguard invests in Chinese military-linked companies: report (Nikkei)

US Investment Fund Financing China's Military Buildup (Newsweek)