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The U.S. government committee called for stricter controls on funds flowing into China’s capital market. If approved, this measure will have a profound impact on asset management companies and index providers.
Newest annual report The report from the U.S.-China Economic Security Review Committee highlighted the security concerns brought about by the substantial increase in U.S. investment. The report submitted to Congress stated that: “U.S. investors’ participation in the Chinese market has surged, surpassing the U.S. government’s defense of the U.S. investment in some problematic Chinese companies against various threats to U.S. national and economic security.”
“Despite the continued tension in Sino-US relations, US investors, asset management companies and mutual funds are increasing their participation in China’s financial markets,” it added.
It stated that the US position in Chinese stocks and debt securities jumped from US$765 billion in 2017 to US$1.2 trillion in 2020, an increase of 57.5%.
According to the report, “Chinese policymakers are seeking foreign capital and fund managers because they are working hard to make China’s capital market a valuable asset. [Chinese Communist party’s] Technology development goals and other policy goals”.
The committee recommended expanding the scope of existing policies to close the “loophole”, stating that US institutional investors can still buy and sell Chinese military-related companies and profit from them, as long as they do not do so in the United States and only involve non-US citizens.
“If we are really interested in protecting the national security of the United States, rather than simply showing it, then we should follow the committee’s recommendations to close this loophole,” it argued.
At the beginning of this year, the sanctions policy was updated release The Office of Foreign Assets Control of the United States stated that entities are “not prohibited” from providing investment management or advisory services to non-Americans, foreign funds or entities to purchase or sell securities that violate the investment ban.
The announcement in June seemed to alleviate some of the concerns of US managers that their onshore operations in China and Hong Kong may be severely affected by US government policies.
The new committee report also addresses the way the Chinese government opens up capital markets to foreign investors.
“The Chinese government only allows foreign companies and investors to enter the Chinese market if it is in the national interest,” it said.
“Therefore, China’s nominal financial’opening’ is actually a carefully managed process aimed at strengthening the state’s control over the capital market and guiding foreign funds to achieve the Chinese government’s national development goals,” the committee said.
A special problem identified by the committee’s analysis is the allocation of Chinese assets by asset management companies through passively managed funds.
Recently, FTSE Russell here we go Gradually include Chinese debt in its flagship World Government Bond Index. The gradual inclusion process that began on October 29 will see Chinese government bonds account for 5.25% of the index within three years.
According to the report, the substantial increase in the inclusion of Chinese securities in the investment index has automated the allocation of Chinese companies by American investors.
“As passively managed index funds replicate these indexes, while actively managed funds seek to at least outperform them, index providers have played a key but unregulated role in guiding foreign portfolio investment to Chinese companies,” it added.
The China Securities Regulatory Commission recommends “requiring index providers to pass the [variable interest entity]Or any of the above-mentioned securities derivatives are regulated by the SEC”.
The committee also recommended that Congress authorize the U.S. Treasury Department to update the accurate U.S. securities investment positions in China since 2008, including funds through offshore centers such as the Cayman Islands.
US President Joe Biden signs executive order in early June prohibit The Americans invested in 59 Chinese companies, including surveillance and defense departments, suspected of ties to the Chinese military, and expanded the earlier orders of former President Donald Trump. However, the order also seems to limit the scope of the policy, alleviating some serious obstacles that worry that US fund groups in Asia may be restricted.
BlackRock, Pioneer, and State Street Global Investments have all invested heavily in China, and many other US management companies, including JPMorgan Chase Asset Management and Morgan Stanley, are also rapidly establishing onshore operations in the market.
Additional reporting by Echo Huang
*Ignites Asia is a news service released by FT Specialist for professionals in the asset management industry. It covers everything from new product releases to regulations and industry trends.Trials and subscriptions are available at ignitesasia.com.