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House Committee Probes U.S. Financial Giants Over Investments in Chinese Companies

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Andrew R. Michaud

• August 03, 2023

The House Select Committee on the Chinese Communist Party is currently conducting an investigation into BlackRock Inc. and MSCI Inc., two major U.S. financial institutions. The committee suspects that these companies have either invested in or enabled the investment of American capital into Chinese companies that reinforce Beijing's military and contribute to human rights abuses. However, industry experts believe that other companies may also come under scrutiny for similar reasons.

BlackRock, the parent company of iShares ETFs, is the largest asset manager in the world, with a staggering $9 trillion in assets under management. On the other hand, MSCI is renowned for its stock indexes, which are linked to over $1 trillion in equity ETFs.

Despite the focus on BlackRock and MSCI, Todd Rosenbluth, the head of research at VettaFi, a prominent provider of data and research for the ETF industry, questions why other companies within the same universe are not being targeted by the investigation. He emphasizes that MSCI is not the only index provider offering exposure to Chinese markets, and BlackRock is not the sole asset manager replicating such benchmarks.

Acknowledging this, a spokeswoman from BlackRock stated that they, like many global asset managers, offer clients a variety of strategies to invest in or exclude China from their portfolios. She further explained that the majority of their clients' investments in China are made through index funds and highlighted that BlackRock is just one of 16 asset managers currently offering US index funds that invest in Chinese companies.

It remains to be seen whether the investigation will expand its scope to encompass other companies involved in investing American capital into Chinese companies. As the inquiry unfolds, it is evident that the impact of these financial giants extends beyond BlackRock and MSCI.

House Committee Alleges Unwitting Funding of Blacklisted Companies

The House committee has recently alleged that American investors have been unknowingly funding companies that have been blacklisted by the U.S. government. These blacklisted companies have been accused of facilitating capital flows, which further exacerbates the national security threat and undermines American values.

In response to these claims, both BlackRock and MSCI, two major financial giants, have issued statements. BlackRock's spokeswoman emphasized that the company complies with all applicable U.S. government laws when it comes to investments in China and global markets. They have also expressed their commitment to engaging directly with the Select Committee to address the concerns raised.

Similarly, an MSCI spokeswoman stated that MSCI indexes are designed to measure the performance of equity markets available to international investors. They follow all relevant U.S. laws and do not manage, recommend, or facilitate investments in any specific country. MSCI is currently reviewing the information request from the House Select Committee.

The investigation into these financial firms has been led by Wisconsin Republican Rep. Mike Gallagher, who chairs the panel, and Rep. Raja Krishnamoorthi of Illinois, the panel's top Democrat. They have written letters to both BlackRock and MSCI, requesting details about their due diligence process when selecting companies for inclusion in their indexes or funds.

To shed light on the operations of these companies, Rosenbluth explained that MSCI's goal with their indexes is to represent the investable universe in various markets. They do not specifically parse through the universe based on certain criteria.

In line with its commitment to providing investment opportunities, BlackRock allows investors to put their money into index trackers.

Overall, these allegations have prompted a closer examination of the investment choices made by these financial giants and their compliance with U.S. government laws. The investigation aims to ensure transparency and uphold national security interests while maintaining trust in the American financial system.

Shaping the Future of U.S.-China Investment Relations

The current landscape of U.S.-China investment relations has sparked numerous debates and investigations. As investors seek exposure to specific sectors and markets, questions surrounding this dynamic have emerged. While some argue that there is nothing inherently untoward about providing exposure to investors' preferences, others contend that it is important to scrutinize these investments further.

Notably, the ongoing investigation into U.S.-China investment relations may lead to the establishment of new regulations. These rules could extend beyond specific entities such as BlackRock or MSCI, potentially affecting a broader range of companies. There is a possibility that the U.S. government might develop restrictions that render certain Chinese companies "uninvestable" from an American perspective, based on specific criteria.

Despite these potential developments, U.S. investors remain eager to tap into China's rapidly expanding market. Whether they maintain full access or face limitations on certain companies, the desire remains strong.

This issue has garnered bipartisan attention, as reflected by the establishment of the House Select Committee on the CCP. The committee's formation, supported by both Republicans and Democrats, underscores a shared commitment to adopt a firm stance towards China.

Since 2024: SEC Implements Delisting Measures for Noncompliant Chinese Stocks.