The House Select Committee has issued letters to BlackRock and MSCI, demanding information on the firms’ China-related activities.
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About the author: Stephen Roach is a senior fellow of the Paul Tsai China Center of Yale Law School and the former chairman of Morgan Stanley Asia. He is the author of Accidental Conflict: America, China, and the Clash of False Narratives (2022).
Congress continues to add fuel to America’s conflict with China. The effort, which has broad bipartisan support, is not just about Taiwan and the provocative meetings of two successive House speakers with Taiwan’s president. It reflects a willingness to go after Americans for having China ties that cross an ill-defined line.
In January, the House established a Select Committee on Strategic Competition Between the United States and the Chinese Communist Party. With 13 Republicans, 11 Democrats, and a staff of around 20, the committee has no legislative authority. However, it does have a bully pulpit to hold hearings, issue subpoenas, write reports, and submit policy recommendations.
In its short existence, the committee has exercised those powers with considerable authority. It has held six decidedly one-sided hearings: on the Chinese military threat (Feb. 28), Uyghur-related human rights issues (March 23), China’s economic aggression (May 17), the perils of U.S. companies operating in China (July 13), and the Biden administration’s China strategy (July 20).
These contentious issues are all the subjects of active debate in the arena of public opinion. But on Aug. 1, the committee issued two letters that ventured into a different area of conflict—the murky realm of financial de-risking. The committee’s premise is to align the intermediation of U.S. saving with sanctions, tariffs, and other actions that have already been taken under the guise of protecting America’s national security and human rights values.
The tactics are focused on indexed funds designed to track the broad universe of Chinese equities. Those funds, the committee’s leaders allege in their letters, “invest or enable the investment of Americans’ savings into dozens of blacklisted Chinese companies.” In other words, the committee’s dubious idea is to alert naïve American investors to the unintended choices they are making to support China’s alleged nefarious activities.
The letters target two U.S. companies: BlackRock, the largest purveyor of indexed funds, and MSCI, the largest compiler of these indices. The companies were each given two weeks to provide detailed information about their China-related activities. The committee’s requests range from a full disclosure of indexed companies, their subsidiaries, and index weights to considerations of national security, conformity with primary and so-called secondary sanctions, and, gulp, assessments of geopolitical risks. There were numerous additional demands, including machine-readable information on due diligence, revenues associated with Chinese indexing, and U.S. investor exposure to suspicious Chinese companies.
The committee framed its approach around lists of targeted Chinese companies allegedly posing the greatest risks to the United States. In the letter to Blackrock, the list contained more than 20 “red flag” companies purportedly involved in direct support to the Chinese military, human rights abuses, and CCP “techno-totalitarianism.” For MSCI, the list was longer—more than 40 companies allegedly engaged in adversarial activities.
Waving “the list” at Blackrock and MSCI has an ugly precedent in an earlier Cold War. In 1950, Sen. Joseph McCarthy waved a purported list of some 205 “card-carrying Communist” employees of the U.S. State Department. That quickly became a primary instrument of intimidation and persecution in a venomous, polarizing era of Red baiting.
The China Committee, unlike McCarthy, has at least put names to its accusations. But its lists of Chinese companies are all drawn from other lists compiled by various parts of the U.S. government. They target so-called dual use Chinese companies that support both civilian and military activities or conflict with American human rights values. Those designations are opaque and were often made for classified reasons that the public can’t second guess. The China Committee’s letters present no new evidence to suggest that the companies did anything wrong. But now anyone remotely associated with them is at risk of being accused of undermining national security.
The Select Committee has far overstepped its purview. It has neither the expertise nor the mandate to intervene in the asset allocation of American investors. It certainly has the right to suggest that these issues could be addressed by existing regulators, including the U.S. Treasury, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Financial Industry Regulatory Authority. But allowing a newly established congressional committee to use its broad advisory powers to launch detailed and onerous interrogations of a leading asset manager and an asset infrastructure firm is yet another example of misdirected Congressional excess exacerbating the risks of an already fraught U.S.-China conflict.
The committee’s chair, Rep. Mike Gallagher (R., Wis.) and its ranking member, Rep. Raja Krishnamoorthi (D., Ill.) write, “It is unconscionable for any U.S. company to profit from investments that fuel the military advancement of America’s foremost foreign adversary and facilitate human rights abuses.” That sweeping statement makes one wonder why any American company involved in China would not be accused of supporting Chinese adversarial power.
The painful lessons of that earlier Red scare shouldn’t be ignored. Nearly 70 years ago, McCarthy accused the U.S. army of Communist infiltration. In response, the Army’s chief counsel, Joseph Welch, put it best: “Have you no sense of decency?” Might we ask the same of the egregious overreach of today’s House Select Committee of China bashers?
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