New HKW report shows extensive holdings of US State Pension Funds in firms on entities list due to ties with Xinjiang

A new report by Hong Kong Watch which is being launched in Washington DC this week has broken down the extensive holdings of US State Pension Funds, institutional investors and endowment funds in firms with ties either to Chinese government activities in Xinjiang or the Chinese military.

The full report can be read here.

The report underlines the breadth of US investment in equities which have “troubling” records, showing that the vast majority of the investment is a result of passive investment strategies which fail to adequately factor human rights considerations into portfolios.

Particular focus is placed on ongoing investment in firms which have been placed on the US Entities List but not the investment ban Executive Order 14032. The executive summary of the report states:

“These firms carry significant ESG risks. Two firms which are widely held by US institutional investors are Zhejiang Dahua Technology and iFlytek. Both of these firms have been accused credibly of being involved in helping to construct the surveillance infrastructure and providing technology for the camps in Xinjiang, China, and therefore investment in these firms could lead to complicity with the Uyghur genocide.”

The report finds that, in the most up to date records as of March 2022, in a “far from comprehensive snapshot of the holdings of leading state pension funds, we found that CalPERS, CalSTRS, PennSERS, Washington State, Washington Consolidated Retirement Board, Montana PERA and others were invested in iFlytek, Zhejiang Dahua Technology, BGI Genomics, AVIChina, China State Construction Engineering, ZTE, China United Network Communication.”

A similar story was true of a range the college endowment funds and university pension funds. Due to their tracking of the MSCI Emerging Markets index, other public bodies which are exposed to these four equities include the Yale University and Columbia University endowment fund. Similar concerns about passive investment strategies, particularly the tracking of the MSCI Emerging Markets Index, contributed to serious exposure to Alibaba and Tencent. These firms not only have been shown to have ties with the Xinjiang public authorities but also were subject to a significant regulatory crackdown in 2021 – leaving US investors exposed.

In the foreword to a new report by Hong Kong Watch, Baroness Morrissey, a leading voice in international finance, underlined that, despite the Ukraine crisis raising the salience of the ‘S’ in ESG, “many Western governments, businesses and institutional investors remain committed to their financial relationships in China, even increasing their exposures in recent months.”

She said: “The list of CCP transgressions against fundamental principles of human rights, freedom and democracy only grows. Yet as the numerous case studies contained within this report show, even many investors priding themselves on their ‘Environmental, Social and Governance’ approach remain invested in China and in Chinese businesses linked to forced labour. The same ESG investors who have proudly and voluntarily signed up to the UN Principles for Responsible Investment, which include specific requirements for monitoring and acting on evidence of violation of human rights. Turning a blind eye is not one of the options.”

The ethics of growing investment in Chinese government bonds is also examined in the report. In May 2021, foreign ownership of Chinese government bonds hit an all-time high of over Rmb3.6 trillion ($562bn USD), a four-fold increase compared with Rmb840 billion holdings in 2017. In 2020 alone, there were inflows of Rmb1 trillion.

Hong Kong Watch co-founder and Research Fellow Johnny Patterson said:

“This report shows that the passive investment strategies pursued by both the leading US State Pension funds and the College Endowment funds have consistently and woefully failed to properly factor in human rights considerations when investing the portfolios of US pensioners. The fact that major state pension funds continue to place serious investment in companies that the US government has placed on Entities Lists because of their complicity in human rights violations is unacceptable.”

“It is particularly jarring that foreign investment in Chinese Government bonds increased by $1 trillion RMB in the same year that China imposed the National Security Law in Hong Kong, he continued”.

Helena Morrissey has served in senior roles for Schroders, Newton Investment Management, Legal and General, and is currently the chair at A.J. Bell. She continued in the foreword to observe the contradiction between ESG positioning and China portfolios:

“ Why the blatant paradox? My interpretation is that the West has already become so economically dependent on China that for many, withdrawal seems an impossibility. It’s a fair challenge but defeatism is highly dangerous. History has shown us time and again that considering anything as ‘too big to fail’ - or too complicated to unravel - is a recipe for disaster. It may be difficult to take action today but it will be harder tomorrow. The West has made a mistake in its naïve commercial dealings with China, summarised by President Clinton’s declaration in 2000, ‘By joining the WTO, China is not simply agreeing to import more of our products, it is agreeing to import one of democracy’s most cherished values—economic freedom.’ Of course, that’s not what happened. Instead, the West gave away its industrial strength. But the price of today’s foray may turn out to be far more than mere dollars or pounds. It’s not far-fetched to be concerned that our democratic freedoms may be next.”