Interested in ETFs?
Visit our ETF Hub for investor insights and insights, market updates and analysis, and easy-to-use tools to help you select the right ETFs.
A U.S. government commission has called for tighter controls on flows to Chinese capital markets, a move that, if approved, would have far-reaching implications for asset managers and index providers.
The latest annual report of the U.S.-China Economic Security Review Commission highlighted security concerns associated with a dramatic increase in U.S. investment. “An increase in the participation of US investors in Chinese markets goes beyond the US government’s defense against the various threats to US national and economic security posed by US investments in certain problematic Chinese companies,” the report told the Congress.
“Despite continuing tensions between the United States and China, American investors, asset managers and mutual funds are increasing their participation in Chinese financial markets,” he added.
He said U.S. positions in Chinese stocks and debt securities jumped 57.5%, from $ 765 billion in 2017 to $ 1.2 billion in 2020.
This article was previously published by Ignites Asia, a title owned by the FT group.
According to the report, “Chinese policymakers are wooing foreign capital and fund managers as they strive to ensure that Chinese capital markets serve as a vehicle for financing the [Chinese Communist party’s] technological development and other policy objectives ”.
The commission suggests expanding the scope of existing policies to close “loopholes,” noting that U.S. institutional investors could still buy, sell and profit from businesses linked to the Chinese military as long as they don’t do so. United States and involved only non-residents. -U.S. Citizens.
“If we are really interested in protecting the national security of the United States rather than just appearances, this loophole should be closed as the commission recommends,” he argued.
Earlier this year, updated sanctions policies issued by the United States Office of Foreign Assets Control stated that entities were “not prohibited” from providing investment management or financial services. advising non-US persons, funds or foreign entities in connection with the purchase or sale of securities that would otherwise violate the investment prohibitions.
The announcement in June appeared to allay some concerns among U.S. executives that their onshore activities in China and Hong Kong could be severely affected by U.S. government policies.
The commission’s new report also tackles how the Chinese government has opened up its capital markets to foreign investors.
“The Chinese government only allows the participation of foreign companies and investors in the Chinese market when it is in its national interest,” he said.
“As a result, nominal financial openness in China is actually a carefully managed process designed to strengthen state control over capital markets and channel foreign funding towards the achievement of the Chinese government’s national development goals,” said the commission.
One particular issue identified by the commission’s analysis concerns asset managers’ allocations to Chinese assets through passively managed funds.
More recently, FTSE Russell has started to gradually include Chinese debt in its flagship global government bond index. The gradual inclusion process, which began on October 29, will see Chinese government bonds totaling 5.25% of the index in three years.
The report says that the substantial increase in the inclusion of Chinese stocks in investment indices has automated the allocation of US investors to Chinese companies.
“Because passively managed index funds replicate these indices and actively managed funds at least seek to outperform them, index providers have played a central but unregulated role in directing foreign portfolio investment to Chinese companies. “, he added.
The commission recommended “to require index providers who include in their indices securities issued on stock exchanges in mainland China or the Hong Kong Stock Exchange, securities of companies headquartered in China and listed on US stock exchanges via a [variable interest entity], or derivatives of any of the foregoing types of securities, be subject to SEC regulation ”.
The committee also advises Congress to ask the US Treasury for an annual update of the precise position of US portfolio investments in China since 2008, including money channeled through offshore centers such as the Cayman Islands.
US President Joe Biden signed an executive order in early June banning Americans from investing in 59 Chinese companies ranging from surveillance and defense sectors to suspected ties to the Chinese military, expanding an earlier executive order by the former president Donald Trump. However, the ordinance also appeared to limit the scope of the policy, alleviating some concerns that U.S. fund groups in Asia may have been severely hampered by the restrictions.
BlackRock, Vanguard and State Street Global Advisors are all heavily invested in China, while many other US managers, including JPMorgan Asset Management and Morgan Stanley, are also quickly building onshore businesses in the market.
Additional reporting by Echo Huang
* Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.
Click here to visit the ETF hub