Vanguard Group, the world’s second-largest asset manager, is acting as a conduit for U.S. investment funds to flow to Chinese military firms and businesses sanctioned for human rights abuses, a new report from a U.S. producer lobby says.
The Alliance for a Prosperous America (CPA), a bipartisan group representing U.S. manufacturers and farmers, said Vanguard Group’s flagship emerging markets fund is investing in 60 companies within China’s military-industrial complex. Some of these companies are subject to U.S. government export controls.
The CPA report said Vanguard funds also hold shares in eight Chinese companies that have been sanctioned by the U.S. government over human rights abuses in China’s Xinjiang region. The U.S. State Department has designated the suppression of Uyghurs in Xinjiang as “genocide.”
Wall Street’s role in financing Chinese companies with ties to the People’s Liberation Army has become increasingly controversial in Washington.
In August, the U.S. House of Representatives China Committee accused asset manager BlackRock and global index provider Morgan Stanley Capital International (MSCI) of facilitating investments that help the Chinese military. BlackRock said at the time that it complied with “all applicable U.S. government laws.” MSCI said it was “reviewing” the lawmakers’ investigation.
Mike Gallagher, the Republican chairman of the House China Committee, told the Financial Times that Congress “must turn off the spigot of American capital flowing to China” and companies with ties to the ruling Chinese Communist Party.
“Americans don’t want companies like Vanguard . . . investing their retirement savings in companies that are building the Chinese Communist Party’s military and committing ongoing genocide against the Uyghur people,” Gallagher said. “If we accept the status quo, we are deliberately contributing to our own destruction.”
China has dismissed criticism of its record in Xinjiang, saying last year that the UN High Commissioner for Human Rights’ findings of “serious human rights violations” in the region were “baseless”.
Vanguard’s $70 billion flagship FTSE Emerging Markets ETF is a “passive” exchange-traded fund designed to track the performance of an index of listed emerging market companies compiled by FTSE Russell.
The CPA report does not allege illegal activity by Vanguard or FTSE Russell. But it said the United States’ “national security, fundamental values, investor protection and economic well-being should always take precedence over short-term profits.”
After being informed of the contents of the CPA report, Vanguard said the asset manager maintained “the highest level of compliance with all applicable laws and regulations.”
“We will continue to monitor developments and welcome further clarification from policymakers,” the company added. “As one of many asset managers that offer investors a range of international investment funds, our clients’ investments in China are primarily transparent. through U.S. passive index products, which provide diversified investments in many developed and emerging economies.”
FTSE Russell, which indexes many Vanguard funds, said it would not comment on reports it had not read. In 2020, FTSE Russell removed eight military-related Chinese companies from some of its indexes.
Case studies cited in the CPA report highlight Vanguard’s role in channeling U.S. client money into subsidiaries of Aviation Industry Corporation of China (Avic) and China Aerospace Engine Corporation, the aerospace conglomerates that promote Beijing’s advanced fighter jets and bomber production.
Both AVIC and AVIC are on the U.S. Department of Commerce’s military end-user list, which restricts trade between them and U.S. companies.
Vanguard’s U.S. investor funds also provided funds to affiliates of the China State Shipbuilding Corporation, a conglomerate with military ties, the report said. A subsidiary of China State Shipbuilding Corporation is said to operate Jiangnan Shipyard, which builds Chinese navy aircraft carriers.
“From an investor protection, national security and human rights perspective, these case studies are both surprising and disturbing,” said Roger Robinson, former chairman of the Congressional U.S.-China Economic and Security Review Commission.
In August, U.S. President Biden issued an executive order restricting some investments in China’s quantum computing, advanced semiconductor and artificial intelligence fields.
Some members of Congress, including Gallagher, have urged the government to expand the scope of the order to include securities investments.
But the Biden administration has opted for a narrower measure that targets private equity and venture capital firms and U.S. investors with joint ventures with Chinese companies.
Alma Angotti, global head of regulatory risk at advisory firm Guidehouse, said asset managers are in a “difficult position” even though their funds “may be very tightly compliant” with the U.S. Treasury Department’s Office of Foreign Assets Control.
Angotti said OPAC may expand its list of prohibited investments to include debt and equity in companies already on other government blacklists.
She said such measures could be taken “very quickly” because they would only require an executive order.
Early in the Biden administration, the U.S. banned Americans from investing in the equity and debt of dozens of other Chinese defense and surveillance technology companies.
Svlook
