Marco Rubio announces a bill that would stop that from happening.
Last week, six senators wrote a letter to the guy who runs the Federal Retirement Thrift Investment Board (FRTIB), which administers the retirement fund for federal employees – including members of Congress, the military and White House staff. Members of Congress have for a while been unhappy with the board’s 2017 decision to switch the benchmark for one of its investment fund to mirror an index with Chinese assets.
For the financially illiterate (like yours truly) that decision means: The federal retirement plan that raises money by investing in the stock market is planning to invest in Chinese companies.
This specific fund is worth a cool $50 billion. The switch to this China-included index is scheduled to take place in mid-2020, and the FRTIB had scheduled a hearing this week to talk about it. The index in question is admittedly huge, with more than 2,000 companies from dozens of countries on it. And of course, not every Chinese company is up to no good. But the senators in their letter pointed out that it includes some, uh, problematic businesses.
Among the Chinese companies included are Hikvision, a surveillance equipment manufacturer that has done very well in China’s ongoing crackdown on its Uighur minority population. It was blacklisted by the Trump administration a few weeks ago, which essentially blocks it from buying product inputs from U.S. companies, and has hired former Republican Senator David Vitter to lobby Washington on its behalf.
Another is ZTE, the telecommunications firm that faced the blacklist last year for selling equipment to Iran and North Korea despite U.S. sanctions … before President Trump walked it back.
And there are others too, like a Chinese weapons-systems manufacturer that makes stealth fighters, and a Chinese cell phone company that the Federal Communications Commission blocked from facilitating international calls in the United States because of concerns over espionage. And there are a number of Russian companies in there that have been sanctioned by Washington over Russia’s war in Ukraine.
Anyway! Back to that hearing.
The financial consultant that recommended the index switch in the first place defended itself, saying carving out Chinese companies would make the index “an outlier by not providing access to emerging markets.” And the board delayed its decision to either stick with the new index or reverse course for at least a couple weeks. Its next meeting is November 13.
But Sen. Marco Rubio, friend of the workin’ man and China skeptic since approximately 2017 and a signer of that recent letter to the FRTIB, wasn’t impressed with that response. And he subsequentially announced legislation that would basically make the board’s decision for it. Bloomberg reports:
A spokesman for Rubio said the bill, which does not yet have co-sponsors, would preclude the savings plan from investing in products or stocks in countries where the Public Company Accounting Oversight Board (PCAOB) is restricted from accessing financial accounting information.
That would mean companies from China. The Chinese government doesn’t allow the PCAOB, a federal institution, to examine the audits of Chinese firms that trade on American stock exchanges, although it’s mandate is to do just that to protect investors. Bloomberg points out that plenty of Chinese companies trade in the on American exhcanges anyway. Rubio’s bill wouldn’t step up PCAOB enforcement, but it very specifically would keep the federal employees’ savings plan from involving itself with those companies.
Ultimately, this boils down to a question about money – good ol’ money – versus principle.
The New York Times quoted a Morgan Stanley officer who (of course) said, “at the end of the day, stock investing is about being exposed to growth. (China) is where the growth is.”
The Times also noted that the board consultant’s analysis back in 2017 found “$1 invested in the securities on the new index would have returned $3.28 after 23 years, while $1 invested in the securities of the original index would have returned $3.05.”
The flip side of that is … the federal retirement plan could soon be investing in companies that help repressive governments in their repression and are loyal to America's military rivals. The Secretary of the Navy, Richard Spencer, summed it up neatly in an op-ed last week – in the first sentence!
"Imagine retiring after a long career serving in uniform, only to learn that your savings all those years had helped fund advanced weapons systems for America’s adversaries."
We’ll keep an eye on this story as it moves forward.