We need clarity on US-China investment policy, not hyperbole 

Just how — if at all — should the U.S. restrict investments in Chinese companies that may threaten our national security? It’s a critical, complex question, but our government still hasn’t offered a clear answer. Individual shareholders and the firms that put together mutual funds are more confused than ever as rhetoric and gesture have overtaken strategy and precision.

Consider a  letter from a House committee revealing that it is investigating BlackRock, the world’s largest asset manager, for offering mutual funds and exchange-traded funds (ETFs) linked to China stock indexes. Such passive investments are perfectly legal. If the panel, which has no legislative authority, really wants to change current law, why target a fund advisor just following the rules rather than consult, say, military, technology or economic experts?

The answer, sadly, is that bashing BlackRock and China in the same breath benefits politicians of both parties but does nothing to fashion serious investment policy. The eight-page letter — which also went to the index compiler Morgan Stanley Capital International (MSCI) — is filled with hyperbolic language and demands answers to such questions as, “How do geopolitical risks factor into your considerations?” BlackRock’s specialty is iShares Exchange Traded Funds (ETF) based on indexes, typically geared to market capitalization, not to subjective matters like geopolitics — as the committee surely knows.

In the letter, Rep. Mike Gallagher (R-Wisc.), chairman of the House Select Committee on the Chinese Communist Party, and Raja Krishnamoorthi (D-Ill.), the ranking member, charged that by facilitating “massive flows of American capital” to Chinese companies, BlackRock and MSCI were “exacerbating an already significant national-security threat and undermining American values.”

It continues: “It is unconscionable for any U.S. company to profit from investments that fuel the military advancement of America’s foremost adversary and facilitate human rights abuses.”

Naming and shaming may have their uses, but the job of legislators is to legislate — and start by working with the administration on a common approach. Instead, on Aug. 9, President Biden issued an executive order that prohibited investments in specific Chinese tech sectors like artificial intelligence but exempted passive fund investments like ETFs, which aren’t a source of new capital.

No one said that developing an investment policy toward China is easy. The economic interests of the two countries are so intertwined that untangling them is a delicate process that affects the livelihoods and liberties of U.S. businesses, workers and investors. Despite tariffs that were imposed by President Trump and continued into the current administration, China is still by far the number-one supplier of goods to the U.S., and total two-way trade between the countries amounted last year to a record $690 billion.

But disrupting capital flows through piecemeal interventions in the market is already having negative consequences here at home. Chinese firms invested $48 billion in the U.S. in 2016 and just $3.1 billion last year. U.S. policies, said The Economist this month, are “bringing neither resilience nor security.”

Chinese equities are relatively inconsequential investments. BlackRock, for instance, offers an exchange traded fund called iShares MSCI Emerging Markets ex China, based on an MSCI index that excludes Chinese stocks. It has $5 billion in assets. One of the mutual funds that the committee letter cites several times, BlackRock China A Opportunities, has only $17 million.

Gallagher and Krishnamoorthi charge that BlackRock has invested $429 million in companies that, it says, “pose national security risks to and act directly against the interests of the United States.” But that amounts to just 1/20,000 of the firm’s assets. And Black Rock is just one of 57 firms that invest in Chinese stocks the committee flags.

BlackRock, Vanguard, Invesco and the others offer these index funds not out of any affection for China but because investors want them. The funds let you assemble a portfolio that reflects the global market as a whole or important parts, like Asian or emerging markets. My own view is that investors should have this kind of choice, the risk to national security is microscopic and the ban the committee clearly wants is a mistake.

Still, the broader national interest can override investor freedoms, and I doubt asset managers would put up much of a squawk if the government included passive investing in its prohibitions. What everyone needs from the government right now is clarity.

Instead, we get grandstanding. Bashing China is about the only bipartisan activity left in Washington. But an anti-Chinese instinct is not a coherent policy.

James K. Glassman, a former member of the SEC’s Investor Advisory Committee and author of three books on personal investing, served as undersecretary of State for Public Diplomacy and Public Affairs in the George W. Bush administration.