A U.S. asset management company is continuing to invest in Chinese companies linked to the People’s Liberation Army (PLA) despite growing scrutiny, a new report has revealed.
The Coalition for a Prosperous America (CPA) reported that the Vanguard Group has invested in 2,100 Chinese A-share companies, exposing U.S. investors to PLA’s subsidiaries despite growing strategic tensions between Washington and Beijing.
CPA wrote that Vanguard’s fund has invested in “60 subsidiaries of Chinese Military Industrial-Complex Companies (CMIC)” and “20 companies denied access to U.S. technology because they are deemed “Military End Users” (MEU).”
One example of Vanguard’s investment is an investment into a subsidiary linked to the Aviation Industry Corporation of China (AVIC), which makes Beijing’s most advanced J-20 stealth jet, based initially on stolen U.S. technology.
The Vanguard Group has $8 trillion in global assets under its management, making it the second-largest asset manager in the world—and a preferred U.S. investment fund for diversified investment options.
Beginning in 2016, Vanguard’s emerging market exchange-traded fund (ETF) transitioned into setting up a benchmark FTSE Emerging Markets All Cap China A Inclusion Index to gain exposure to mainland companies.
Vanguard used the Stock Connect program, a mutual market access program, to invest in A-share companies listed on the Chinese mainland. The same program allowed Chinese companies listed on the mainland to purchase stocks of some Hong Kong-listed companies.
Vanguard FTSE Emerging Markets ETF has invested in A-share in Chinese companies linked to China’s military-industrial complex.
The Stock Connect allows a phenomenon called “northbound traffic,” in which U.S. funds buy A-shared stocks listed on the Shenzhen and Shanghai stock exchanges. CPA found that A-shared monthly turnover activity (including buying and selling) and the ETF averages add up to $350 billion.
The A-shares are a problematic list of equities traded in Renminbi on the Shanghai and Shenzhen stock exchanges. Many of these A-shares are Chinese companies acting as an extension of the People’s Liberation Army-backed companies or state-owned defense conglomerates.
Vanguard’s holding of the A-shares outstrips the shares held by Blackrock’s EM fund, which has holdings in 402 A-share companies. Another fund, State Street, holds stocks in 778 A-share companies in its EM funds.
“There is no coherent U.S. policy on investing in Chinese publicly traded securities or private companies. The legal status of A-shares and the appropriateness of holding these equities in American investment portfolios remains an open question,” CPA said in its report.
CPA said that Vanguard needs to adequately inform the retail investors about the risks involved as the Chinese A-share companies aren’t subject to international accounting standards to protect the interests of U.S. customers.
CPA is a bipartisan national organization representing U.S. domestic companies across different sectors and industries of the economy. CPA’s latest report draws attention to the loophole large asset management companies use to pour even people’s retirement savings into PLA-linked companies.
Newsweek previously revealed that the U.S. federal government’s Thrift Savings Plan was investing funds in federal employee’s retirement savings plans into Beijing’s military companies. Though the investment into these companies may not be illegal under U.S. law, it raises the ethical question about backing the military-linked companies of the U.S.’ primary strategic adversary.
Rep. Mike Gallagher (R-WI) asked Congress to pass legislation to “stop funding the Chinese Communist Party‘s military and human rights abuses” in a video message posted on X, formerly Twitter, on Sunday.
“Many of these companies are creating weapon systems that may be targeting American service members as we speak. Vanguard is directing Americans’ savings to fund our own potential destruction. God forbid there’s ever a Taiwan Strait conflict where weapons that Vanguard underwrote are used against American men and women in uniform,” said Gallagher.
Sen. Marco Rubio (R-FL) has called out Vanguard for funneling U.S. dollars into Chinese companies.
“China continues to exploit America’s capital markets, and firms like Vanguard held make that possible by funneling American dollars into Chinese companies,” he said.