Finance officials from more than ten U.S. states have sent a letter to public pension fund trustees urging them to divest from China. They warned that the lack of transparency in the Chinese market under the cover of the Chinese Communist Party (CCP) could result in significant losses if divestment is not done promptly.
In their letter to the trustees of public pension funds, a total of 18 state finance officials stated, “State fund trustees have a responsibility to investigate investments, to supervise and stop reckless investments to ensure fund growth, and to protect future beneficiaries.”
“Now is the time to divest from China,” these officials urged.
According to a report by Fox News, these 18 finance officials, including treasurers from states such as Alabama, Arkansas, Alaska, Arizona, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Pennsylvania, South Carolina, and Wyoming were among the signatories of the letter.
The finance officials noted that the CCP’s crackdown on due diligence firms has compromised the reliability of financial audits. At the same time, the CCP has intervened in the stock and bond markets to mask capital outflows.
The letter also warned that the CCP exercises extensive control over Chinese businesses, including arranging military and intelligence personnel within companies, and trustees should consider the risks involved in investing in Variable Interest Entities (VIE) in Chinese companies.
VIE, also known as the Variable Interest Entity structure, is different from the conventional equity control method where control is exerted through shareholding agreements rather than direct equity ownership.
In fact, VIE is an operational structure proposed to circumvent the restrictions or prohibitions on foreign investment imposed by Chinese laws and regulations. When Chinese companies such as Sina, Baidu, Tencent, and Alibaba go public overseas, they often utilize the VIE model to navigate legal complexities.
VIE is the most common form of Chinese investment for U.S. investors. However, the U.S. Securities and Exchange Commission (SEC) has cautioned that the CCP could suddenly declare VIE as illegal, posing significant risks to VIE investors.
Furthermore, concerns over geopolitical tensions, such as a potential Chinese invasion of Taiwan, also weigh heavily on investors’ minds.
Officials warned that foreign investment in China is noticeably decreasing, leading to a significant outflow of funds from the Chinese market. This trend has prompted some trustees of pension funds, including those from Florida, Indiana, and Missouri, to reassess their investments in China.
The letter pointed out, “Prior to the Russian invasion of Ukraine in 2022, many trustees, including state retirement plans, did not heed similar warnings. As a result, assets entrusted by states for retirees suffered losses amounting to billions of dollars.”
The letter emphasized, “Pension committees should learn from past mistakes, or else they are doomed to repeat them. As state government finance officials, we urge public pension committees to analyze these issues, identify investments in China, and divest from these investments in accordance with their fiduciary duties.”
Earlier this year, a report from the U.S. House Committee on China concluded that in 2023, $6.5 billion in American retirement funds flowed to 63 blacklisted Chinese companies. The U.S. government believes these companies support CCP military development or violate human rights.