In-Depth: Sponsoring Rep. Jim Banks (R-IN) introduced this bill to prevent the Thrift Savings Plan, a federal retirement plan, from investing in China and Russia:
“The governments of Russia and China have a long history of malicious activity against the United States. If we are to confront the growing threats from these hostile countries, we should not be supporting their economies financially. This common-sense legislation would prevent federal money from entering countries that are actively attempting to undermine our global leadership.”
The Trump administration has discussed imposing restrictions on capital flows into China, with a particular emphasis on investments made by U.S. government pension funds. According to Bloomberg, the office of Larry Kudlow, director of the White House’s National Economic Council, convened a policy-coordination committee meeting with officials from the National Security Council and the Treasury Dept. on the topic in early October.
Interpreting the October meeting as support for his bill, Rep. Banks said:
“I am encouraged to see the Trump administration considering taking executive action to protect U.S. government workers from having to support the Chinese Communist Party with their retirement funds. China commits human-rights violations and threatens U.S. national security through economic and military actions every single day. We’ve been asleep at the wheel for too long, and I’m glad the U.S. is finally waking up to this threat.”
The TSP opposes this bill. In May 2019, TSP spokeswoman Kim Weaver said the agency would oppose this bill. She added:
“It is intended, and I’m quoting, ‘to force the [Federal Retirement Thrift Investment Board] to re-evaluate its choice of index funds for the I Fund.’ I did have conversations with staff prior to its introduction, and what we’ve learned is that if the federal government, or an entity of the federal government, takes action against a foreign company, [the operator of the new investment index] would remove them from the investment index. We’ve provided that information to staff, but the bill is something that we’d likely oppose.”
This legislation has 10 Republican cosponsors.
Of Note: Federal retirement plans, including the Thrift Savings Plan (TSP), invest a total of over $599.5 billion (as of July 2019) on behalf of plan participants. The TSP has four market funds that members can contribute to:
- C Fund: Invests members’ money into the Standard & Poor’s 500 (S&P 500) Index, a mix of stocks of 500 large- to medium-sized U.S. companies
- S Fund: Invests in smaller U.S. companies not included in the S&P 500
- F Fund: Invests in corporate and government bonds
- I Fund: Invests in international stock markets
On November 28, 2017, the TSP’s administrator, the Federal Retirement Thrift Investment Board (FRTIB), adopted a motion to have the Thrift Savings Plan’s international Stock Fund (“I Fund”) mirror the Morgan Stanley Capital International All Country World ex U.S. Investable Market Index. That index captures large- mid-, and small-cap representation in 22 developed markets and 26 emerging markets, including China.
This proposal was adopted on the recommendation of Aon Hewitt Investment Consulting Inc., which advised the FRTIB to broaden the I Fund’s benchmark beyond the MSCI Europe, Australasia and the Far East Index, which excluded the U.S., Canada and China. AHIC reasoned, “inclusion of emerging markets and international small cap equities to the I fund will not hinder the ability to meet the TSP’s daily liquidity needs.” It also said that the new benchmark, the MSCI ACWI ex U.S. IMI, generates the “highest expected yield and percentage out on loan.”
At the end of October 2019, Aon presented an updated study of the I Fund benchmark proposal and recommended that the FRTIB move forward with the planned index change. In its study, Aon said that "[m]oving from the MSCI EAFE Index, which represents 58% of the international equity market, to the MSCI ACWI ex USA IMI Index, which represents 99% of the international equity market, is a more representative benchmark and better fulfills the intent" of the board's mission of serving investors by delivering strong returns.
Currently, the FRTIB plans to make the transition to the MSCI ACWI ex U.S. IMI in the second half of 2020. As currently planned, the reformatted I Fund would invest about 7.5% of its assets in China. With the I Fund’s current valuation of $40 billion, that means the new investment would shift around $3 billion to Chinese investments.
After the FRTIB’s announcement, Sens. Marco Rubio (R-FL) and Jeanne Shaheen (D-NH) sent FRTIB Chairman Michael Kennedy a letter urging the board to reverse its decision. In their August 26, 2019 letter, they argued that the move would expose nearly $50 billion in federal employees’ retirement assets to “severe and undisclosed material risks associated with many of the Chinese companies listed on this MSCI index.” They also argued that many Chinese issuers on the MSCI ACWI ex U.S. IMI “pose national security, human rights, and financial disclosure risks,” citing specific examples (AviChina Industry & Technology Ltd., China Mobile Ltd., Hangzhou Hikvision Digital Technology, ZTE Corporation, and Kangmei Pharmaceutical Co.) to back up their claims.
In a statement, Sen. Rubio called the FRTIB’s decision to invest in Chinese companies “shortsighted” and “foolish”:
"The Federal Retirement Thrift Investment Board made a short-sighted — and foolish — decision to effectively fund the Chinese government and Communist Party's efforts to undermine U.S. economic and national security with the retirement savings of members of the U.S. armed services and other federal employees. Many Chinese companies included in MSCI indexes are not just involved in China's military, espionage and human rights abuses, they are also state-owned or state-directed enterprises used as tools by the Communist Party to undermine American companies and workers. The Federal Retirement Thrift Investment Board should publicly reverse this decision immediately."
In comments to CNBC’s “Squawk Box,” Sen. Rubio also cited concerns with Chinese securities’ opacity and Chinese companies’ tendency to be either government-backed or government-controlled:
“There are transparency requirements you have to be able to go see the audits why because you want shareholders to be protected there’s disclosure requirements things that you want people to know about those companies the risks they’re running the decisions they’re making and how they’re being managed. We don’t have that insight when it comes to these Chinese control companies. The Chinese require all of these records to be kept in the mainland, and they block our ability, our regulators’ ability to go in and see what’s going on truly behind the scenes and so you have American investors, including federal employees through the retirement program, the TSP program, investing their hard-earned dollars for their future retirement into companies, which we have no oversight in comparison to virtually every other company … selling securities on our exchanges and our markets.”
On October 23, 2019, Secretary of the Navy Richard V. Spencer wrote an opinion article in The Wall Street Journal opposing the FRTIB’s plans. Spencer — a 16-year Wall Street veteran prior to his current role — argued that investing federal employee and military members’ money in China is wrong for both national security and human rights reasons.
The FRTIB has responded to criticism of its plan to expand the I fund by saying that expanding investment options can yield higher returns for TSP participants and truly represent a global market.
Summary by Lorelei Yang(Photo Credit: iStockphoto.com / jxfzsy)