US government pension fund halts plan to buy Chinese stocks

The main US federal government retirement fund has halted a plan to shift some of its investments into Chinese companies, after criticism from President Donald Trump that the move would have hurt national security.

The Federal Retirement Thrift Investment Board, a government agency that manages $594bn in assets for 5.9m workers through its Thrift Savings Plan, said it would postpone a long-planned change to the composition of its international portfolio, two days after the White House raised concerns about the move.

The reversal was a victory for critics who said the TSP would have invested government employees’ money into Chinese companies that the Trump administration says threaten the US national interest.

It also marked the latest escalation in US-China tensions and comes as Mr Trump blames China for the coronavirus pandemic. Ahead of the FRTIB’s decision, Beijing slammed the White House demand, which it said would hurt American investors.

The FRTIB said it had deferred the move because of “a meaningfully different economic environment related in large part to the impact of the global Covid-19 pandemic, as well as the nomination of three new FRTIB board members”.

Mr Trump last week sent nominations to Congress to replace three of the five board members, meaning the delay will almost certainly punt the decision to a board that will be favourable to the president.

The FRTIB in November ignored opposition from Congress in deciding to proceed with its plan to use the MSCI All Country World ex-US Investable Market index, which includes Chinese companies.

But the White House this week said it should reconsider, given how China had responded to Covid-19. The White House did not comment on the reversal on Wednesday, but Mr Trump repeated his recent criticism of China.

“We just made a great Trade Deal, the ink was barely dry, and the World was hit by the Plague from China. 100 Trade Deals wouldn’t make up the difference — and all those innocent lives lost!” he tweeted.

The White House on Monday told Eugene Scalia, the labour secretary who has some oversight over the TSP, that using the MSCI index would “expose the retirement funds to significant and unnecessary risk” by investing in Chinese companies that pose national security and humanitarian concerns and violate US sanctions.

In a letter, Robert O’Brien, national security adviser, and Larry Kudlow, the White House economic adviser, warned against investing in Chinese companies since there was a “possibility that future sanctions will result from the culpable actions of the Chinese government with respect to the global spread of the Covid-19 pandemic”.

The officials said some of the Chinese companies in the MSCI index were involved in providing equipment to the Chinese military, while others supplied surveillance equipment that Beijing was using to repress religious minorities. They said some other groups were violating US sanctions by dealing with Iran and North Korea.

In response, Mr Scalia, who was appointed by Mr Trump, told the FRTIB that Mr Trump wanted the board to “immediately halt all steps associated with investing” in the index.

When it rejected calls to reverse course in November, Michael Kennedy, FRTIB chair, had said not being able to invest in Chinese companies would place federal workers at a financial disadvantage.

The reversal was welcomed by critics on Capitol Hill, including Marco Rubio, a Florida Republican senator, who has co-authored legislation that would ban FRTIB from investing in Chinese companies.

“While it should never have taken the FRTIB this long to reverse their misguided, deeply flawed decision to invest federal retirement savings in opaque Chinese firms engaged in human rights abuses and a wide range of military-related activities, I appreciate the board halting this action,” Mr Rubio said in a statement to the Financial Times.

In a statement with Mr Rubio, Jeanne Shaheen, a Democratic senator from New Hampshire, thanked Mr Trump for putting pressure on the FRTIB, which had shown no sign of caving to the pressure from Congress. “Today’s reversal sends a clear message to China that there are consequences for its malign behaviour.”

Follow Demetri Sevastopulo on Twitter: @dimi

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