House committee quizzes BlackRock and MSCI on China investments

The US House of Representatives China committee has accused BlackRock and MSCI of profiting from investments that help the Chinese military and undermine American values and security.

In letters to BlackRock chief executive Larry Fink and MSCI head Henry Fernández, the top Republican and Democrat on the panel said the groups’ decisions meant American investors in their funds were “unwittingly funding” Chinese companies that develop weapons for the People’s Liberation Army.

“It is unconscionable for any US company to profit from investments that fuel the military advancement of America’s foremost foreign adversary and facilitate human rights abuses,” the Republican chair Mike Gallagher and top Democrat Raja Krishnamoorthi wrote.

The lawmakers said the groups were investing in Chinese companies that the US government has blacklisted due to PLA connections or their role in enabling human rights abuses.

The committee said BlackRock, the world’s largest asset manager, and MSCI, a compiler of stock market indices, were “facilitating massive flows” of US capital into Chinese army-related groups which was “exacerbating an already significant national security threat and undermining American values”.

The letters come as the committee, which was created in January to focus on the Chinese Communist party, launches a series of investigations into Chinese activities and investments by US companies in Chinese groups.

The committee does not have the authority to generate legislation, but people familiar with its actions said companies are paying close attention and hoping the committee does not call executives to testify.

The congressional effort comes as the Biden administration continues to implement policies to make it harder for China to secure advanced US technology.

President Joe Biden is preparing to release an executive order that would intensify scrutiny on US companies investing in sensitive sectors in China including microchips, quantum computing and artificial intelligence. The order is expected to create a mechanism that would require companies to notify the government of certain investments and would create investment prohibitions in certain sectors.

BlackRock said it was one of 16 asset managers that offer US index funds investing in Chinese companies and that it “complies with all applicable US government laws”. The group added that it would “continue engaging” with the China committee on the issue. MSCI said it was “reviewing the inquiry” from the lawmakers.

Gallagher and Krishnamoorthi said BlackRock facilitated investments into over 20 blacklisted Chinese entities and had invested at least $429mn into Chinese groups that acted “directly against the interests of the United States”.

The two lawmakers said more than 40 Chinese companies blacklisted by the US government were included in various MSCI indices. The blacklisted groups accounted for almost 5 per cent of the value of MSCI’s China A shares index, which tracks mainland Chinese companies listed on either the Shanghai or Shenzhen stock exchanges.

The lawmakers asked the companies to explain how they make investment decisions related to China and if they consider factors such Chinese companies’ inclusion on US blacklists or issues such as national security or human rights. The letters were first reported by the Wall Street Journal.

Todd Rosenbluth, head of research at the consultancy VettaFi, questioned why the investigation was focused only on BlackRock and MSCI. “If the government is concerned about US tracker funds investing in these Chinese companies, then it should be looking at all of the funds that are tracking similar indices,” he said.