“Tens of billions of dollars” invested by Vanguard in China, notably in military companies that “threaten the security of the United States”

2023-10-18 14:02:17

ECONOMY – “Tens of billions of dollars” invested by Vanguard in China, notably in military companies that “threaten the security of the United States”

Vanguard’s investments in Chinese military companies go down badly in the United States. According to the report by a bipartisan American organization, the world’s number 2 in asset management, after the all-powerful BlackRock, has invested in more than 2,000 Chinese companies, including around sixty subsidiaries of the military-industrial complex. Vanguard says it maintains “the highest levels of compliance with all applicable laws” but the Coalition for a Prosperous America (CPA) believes that “national security” et “the economic well-being of the United States should be the priority”in a context marked by strong tensions between Washington and Beijing.

Just like its direct competitor, BlackRock, Vanguard is an investment fund that manages $7.2 trillion in assets for a portfolio of 30 million clients. These two financial leviathans hold shares in the largest companies in the world, such as pharmaceutical laboratories (Pfizer of which he is the largest shareholder, Jonhson & Johnson, Moderna, AstraZeneca and Sanofi) or tech or other companies (Microsoft, Meta , Alphabet, Netflix, ExxonMobil…). With State Street, these three giants form the “Big Three”, holding 80% of American ETF (Exchange Traded Funds) assets.

The omnipresence of BlackRock and Vanguard in the majority of the world’s largest companies is such that some see it as an economic danger. And the Chinese military-industrial complex, one of the world’s largest employers in the sector, is no exception.

“Tens of billions of dollars” invested

In a rapport published last week, the Coalition for a Prosperous America (CPA), which defines itself as a bipartisan organization representing the interests of American producers and manufacturers, revealed that Vanguard “acts as a conduit through which US investments are channeled to China”. “Some of these companies clearly threaten U.S. national security and human rights”lit.

The CPA estimates the amount of investments at “tens of billions of dollars”transported to “more than two thousand Chinese companies”. Among these, around sixty are subsidiaries of the Chinese military-industrial complex, some of which are subject to export restrictions imposed by the United States government, such as the Aviation Industry Corporation of China (Avic) and Aero. Engine Corporation of China. Vanguard also has stakes in eight Chinese companies sanctioned by the United States for human rights violations in the Xinjiang region, home to Uighur minorities. Accusations “without foundation” rejected by Beijing.

The financial giant, based in Pennsylvania, also has holdings in around twenty companies, considered “military end users” and who were therefore denied access to American technology.

How does Vanguard invest in these companies? Thanks to ETF, an index fund traded on an exchange, which seeks to follow the evolution of a stock index as closely as possible. In 2016, the American group created a benchmark index called FTSE Emerging markets all cap China an inclusion index (INDEXFTSE), to attract the interest of Asian companies. Vanguard’s ETF fund, worth $70 billion, invested in class A shares of Chinese companies listed on the Shenzhen or Shanghai stock exchanges. A class A share designates a category of assets offering its holders advantages such as voting rights or dividend priority.

Calls to “turn off the tap” of US capital to China

The CPA notes in its report that the monthly turnover generated by A-shares and ETFs amounts to $350 billion. If BlackRock holds a large lead over Vanguard in terms of holding American ETF assets under management, the world number 2 is ahead of its competitor in holding A shares.

Vanguard’s stakes in subsidiaries of the Chinese military complex have drawn strong criticism from representatives. Mike Gallagher, Republican chairman of the China Committee, believes that Congress “must turn off the tap of American capital flowing to Beijing”. “Americans don’t want companies like Vanguard and investing their retirement savings in Chinese Communist Party companies”did he declare.

The same commission accused BlackRock in August of “facilitate investments that help the Chinese military”. While the CPA does not accuse Vanguard of any illegal activity, the organization believes that “national security, core values, investor protection, and the economic well-being of the United States should always take priority over short-term profits”.

The investment fund defended itself by claiming to maintain “the highest levels of compliance with all applicable laws and regulations”. “As one of many international asset managers, our clients’ investments in China are primarily through U.S.-based passive index products”added Vanguard.

Since taking office, the Biden administration has increased sanctions against Beijing, Washington’s economic, military and technological rival. One of his first measures prohibited Americans to invest in the shares of Chinese defense and surveillance companies. In August, President Joe Biden issued an executive order restricting certain investments in China’s quantum computing, advanced semiconductor and artificial intelligence sectors.

In response to multiple waves of American sanctions, China imposed restrictions on exports of two metals (gallium and germanium), of which it is the main world producer and which are essential for the manufacture of semiconductors.