Rethinking Investments: Vanguard’s Controversial Role in Funneling Funds to Chinese Military Companies and Human Rights Violators
The Conduit: Vanguard and U.S. Investment in China
Vanguard, the world’s second-largest asset manager, has recently found itself in the middle of a controversy. Acting as a conduit through which U.S. investment dollars are funneled to Chinese military companies and companies sanctioned for violations of human rights, Vanguard’s actions have raised concerns among bipartisan organizations and lawmakers.
The Coalition for a Prosperous America (CPA), a bipartisan organization representing exclusively U.S.-based manufacturers and farmers, has revealed that Vanguard’s flagship emerging markets fund is channeling investments into 60 companies within the complex Chinese military industrialist. Some of these companies are even subject to U.S. government export controls.
Vanguard’s funds also have stakes in eight Chinese companies that have been sanctioned by the U.S. government for human rights abuses in China’s Xinjiang region, which the U.S. State Department has referred to as “genocide”. This revelation has further fueled the controversy surrounding Wall Street’s role in financing Chinese companies linked to the People’s Liberation Army.
Wall Street’s Controversial Role
The controversy surrounding Vanguard is not an isolated case. In August, the U.S. House of Representatives China Committee accused asset manager BlackRock and global index provider MSCI of facilitating investments that support the Chinese army. BlackRock, in response, stated that it complies with all applicable U.S. government laws, while MSCI mentioned that it was reviewing the inquiry by lawmakers.
The growing concern in Washington has prompted calls to “turn off the spigot of American capital flowing into China” and companies linked to the ruling Chinese Communist Party, as pointed out by Mike Gallagher, the Republican chairman of the House China Committee. Gallagher emphasizes that Americans do not want their retirement savings invested in companies that build the Chinese Communist Party’s military and contribute to the ongoing genocide against the Uyghur people.
Vanguard’s Role: Connecting the Dots
As the controversy unfolds, it becomes essential to understand Vanguard’s role in facilitating these investments. Vanguard’s $70 billion flagship FTSE Emerging Markets ETF is a passive exchange-traded fund that seeks to track the performance of an index of companies listed in emerging markets compiled by FTSE Russell.
The CPA report does not allege illegal activity by Vanguard or FTSE Russell, but it raises concerns about national security, fundamental values, investor protection, and the economic well-being of America. The report argues that these concerns should always take precedence over short-term profits.
However, it is important to note that Vanguard, after being made aware of the contents of the CPA report, stated that the asset manager maintains “the highest levels of compliance with all applicable laws and regulations.” Vanguard continues to monitor developments in the situation and welcomes further clarity from policymakers.
FTSE Russell, which compiles the indexes used for many Vanguard funds, has not commented on reports it has not read. However, it has fallen eight Chinese military-related companies from some of its indices in 2020, indicating a certain degree of vigilance in light of growing concerns.
Connecting the Dots: Controversial Investments
The case studies cited in the CPA report shed light on Vanguard’s role in funneling U.S. customer money into subsidiaries of Aviation Industry Corporation of China (Avic) and Aero Engine Corporation of China (AECC), two aerospace groups that lead Beijing’s production of advanced fighter jets and bombers.
Both Avic and AECC are on the U.S. Commerce Department’s military end-user list, which restricts trade between them and U.S. companies. This revelation raises questions about the ethics and consequences of investing in companies with ties to the Chinese military.
Furthermore, U.S. investor capital from Vanguard has also funded affiliates of the China State Shipbuilding Corporation (CSSC), a military-linked conglomerate. The report highlights the example of a subsidiary of CSSC, which operates the Jiangnan Shipyard, where Aircraft carriers of the Chinese navy were built. These case studies underline the troubling implications from an investor protection, national security, and human rights perspective.
Broader Implications: A Call for Action
The controversy surrounding Vanguard’s role in funneling funds to Chinese military companies and human rights violators carries broader implications for the investment landscape and U.S.-China relations.
Alma Angotti, head of global regulatory risk at consultancy Guidehouse, emphasizes the difficult position asset managers find themselves in. While their funds may be compliant with the Asset Control Office foreign affairs of the U.S. Treasury, they still face ethical questions and potential risks.
Angotti suggests that the Office of Foreign Assets Control (OFAC) is likely to expand its list of banned investments to include debt and equity from companies already mentioned on other government blacklists. Such a move could be made quickly through an executive order. The U.S. has already taken steps to ban Americans from investing in the equity and debt of dozens of Chinese defense and surveillance technology companies.
Rethinking Investments: A Way Forward
The revelations regarding Vanguard’s role in funneling funds to Chinese military companies and human rights violators highlight the need to reassess investment strategies and take a principled approach.
Investors, asset managers, and policymakers must consider the broader implications of their investment decisions, beyond short-term profits. It is crucial to prioritize investor protection, national security, human rights, and the economic well-being of America.
Some possible steps for rethinking investments in the context of China include:
- Enhancing transparency and disclosure requirements for investments in companies linked to the Chinese military or involved in human rights abuses
- Engaging with stakeholders to develop ethical investment guidelines and frameworks
- Supporting the development of alternative investment options that align with investor values and promote ethical practices
- Encouraging collaboration between governments, asset managers, and investors to address the challenges posed by investments in controversial sectors
Conclusion
The controversy surrounding Vanguard’s role in funneling funds to Chinese military companies and human rights violators sends a clear message to investors and asset managers. It is no longer sufficient to focus solely on financial gains; greater emphasis must be placed on ethical considerations, national security, and human rights.
As the investment landscape continues to evolve, it becomes imperative for all stakeholders to reassess their strategies and collaborate on innovative solutions. By rethinking investments and prioritizing long-term sustainability, investors can contribute to a more ethical and responsible global financial system.
Summary
Vanguard, the world’s second-largest asset manager, has faced criticism for acting as a conduit for U.S. investment dollars to flow into Chinese military companies and companies involved in human rights abuses. The Coalition for a Prosperous America (CPA) highlighted Vanguard’s flagship emerging markets fund’s investments in 60 companies within the Chinese military industrialist and eight Chinese companies sanctioned by the U.S. government for human rights abuses. This controversy is not limited to Vanguard, as other asset managers have also faced accusations of supporting the Chinese army. As the debate intensifies, it is crucial for investors and asset managers to reassess their investment strategies and prioritize ethics, national security, and human rights. Transparency, collaboration, and the development of alternative investment options aligned with investor values are some potential pathways for rethinking investments in controversial sectors and promoting a more responsible global financial system.
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Vanguard, the world’s second-largest asset manager, is acting as a conduit through which U.S. investment dollars are funneled to Chinese military companies and companies sanctioned for violations of human rights.
The Coalition for a Prosperous America (CPA), a bipartisan organization representing exclusively U.S.-based manufacturers and farmers, said Vanguard’s flagship emerging markets fund is channeling investments into 60 companies within the complex Chinese military industrialist. Some companies are subject to U.S. government export controls.
Vanguard The funds also have stakes in eight Chinese companies sanctioned by the US government for human rights abuses in China’s Xinjiang region, the CPA report said. The US State Department has called the repression of the Uighur minority in Xinjiang “genocide”.
Wall Street’s role in financing Chinese companies linked to the People’s Liberation Army is becoming increasingly controversial in Washington.
In August, the US House of Representatives China Committee accused asset manager BlackRock and global index provider MSCI of facilitate investments who helped the Chinese army. BlackRock said at the time that it complies with “all applicable U.S. government laws.” MSCI said it was “reviewing the inquiry” by lawmakers.
Mike Gallagher, Republican chairman of the House China Committee, told the Financial Times that Congress “must turn off the spigot of American capital flowing into China” and companies linked to the ruling Chinese Communist Party.
“Americans don’t want companies like Vanguard. . . to invest their retirement savings in companies that build the Chinese Communist Party’s military and carry out the ongoing genocide against the Uyghur people,” Gallagher said. “If we accept the status quo, we are willfully fueling our own destruction.”
China rejects criticism of its situation in Xinjiang, saying last year that the United Nations High Commissioner for Human Rights’ findings of “serious human rights abuses” in the region were “unfounded.”
Vanguard’s $70 billion flagship FTSE Emerging Markets ETF is a “passive” exchange-traded fund that seeks to track the performance of an index of companies listed in emerging markets compiled by FTSE Russell.
The CPA report does not allege illegal activity by Vanguard or FTSE Russell. But it says that “national security, fundamental values, investor protection, and the economic well-being of America should always take precedence over short-term profits.”
Vanguard, after being made aware of the contents of the CPA report, said the asset manager maintained “the highest levels of compliance with all applicable laws and regulations.”
“We continue to monitor developments and would welcome further clarity from policymakers,” the company added. “As one of many asset managers offering investors a range of funds to invest internationally, our clients’ investments in China are primarily through US-based passive index products that provide diversified exposure to many developed and emerging.”
FTSE Russell, which compiles the indexes used for many Vanguard funds, said it does not comment on reports it has not read. FTSE Russell fallen eight Chinese military-related companies from some of its indices in 2020.
The case studies cited in the CPA report highlight Vanguard’s role in funneling US customer money into subsidiaries of Aviation Industry Corporation of China (Avic) and Aero Engine Corporation of China, aerospace groups that lead Beijing’s production of fighter jets and bombers advanced.
Both Avic and AECC are on the U.S. Commerce Department’s military end-user list, which restricts trade between them and U.S. companies.
U.S. investor capital from Vanguard also funded affiliates of the China State Shipbuilding Corporation, a military-linked conglomerate, the report said. A subsidiary of CSSC operated the Jiangnan Shipyard, where Aircraft carrier of the Chinese navy were built, he said.
“These case studies are striking and troubling from an investor protection, national security and human rights perspective,” said Roger Robinson, former chairman of the US-China Congressional Economic and Security Review Committee.
In August, US President Joe Biden issued an executive order restricting some investments in China’s quantum computing, advanced semiconductor and artificial intelligence sectors.
Some members of Congress, including Gallagher, have urged the administration to expand the order to include portfolio investments.
But the Biden administration opted for a narrower measure, aimed largely at private equity and venture capital firms and U.S. investors that have joint ventures with Chinese groups.
Alma Angotti, head of global regulatory risk at consultancy Guidehouse, said asset managers were being put in a “difficult position”, even though their funds were “probably very strictly compliant” with the Asset Control Office foreign affairs of the US Treasury.
Angotti said OFAC was likely to expand its list of banned investments to include debt and equity from companies already mentioned on other government blacklists.
Such a move could be made “very quickly,” he said, as it would only require an executive order.
Early in the Biden administration, the United States banned Americans from investing in the equity and debt of dozens of other Chinese defense and surveillance technology companies.
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