President Donald Trump has ordered the main federal government pension fund not to invest its portfolio in Chinese companies, which his administration says pose a serious national security risk to the US.
The intervention comes as the Federal Retirement Thrift Investment Board, an agency that manages almost $600bn in its “Thrift Savings Plan”, prepares to shift the international component of the fund into an index that includes Chinese companies.
Robert O’Brien, US national security adviser, and Larry Kudlow, the White House economic adviser, said using the MSCI All Country World ex-US Investable Market index would “expose the retirement funds to significant and unnecessary risk” because they would be investing in Chinese companies that pose both national security and humanitarian concerns by operating in violation of US sanctions.
The FRTIB in November rejected a request from a bipartisan group of senators not to invest in the index, saying that such a move would disadvantage the roughly 5.5m federal employees who invest in the retirement fund.
But the White House stepped up pressure this week, as Mr Trump blamed China for the Covid-19 pandemic.
In a letter to Eugene Scalia, the labour secretary who has oversight of TSP, Mr O’Brien and Mr Kudlow said the risks of having Chinese stocks in the portfolio included the “possibility that future sanctions will result from the culpable actions of the Chinese government with respect to the global spread of the Covid-19 pandemic”.
As Mr Trump has been criticised for his handling of the pandemic, he has blamed China and suggested that Beijing would pay a price. The White House officials said the FRTIB should consider China’s actions regarding Covid-19, which came after the board’s November refusal to reverse course.
“The Chinese government concealed critical information from the United States and the rest of the world regarding Covid-19 and exacerbated the ensuing global pandemic,” Mr O’Brien and Mr Kudlow wrote.
In response to the White House concern, Mr Scalia told Michael Kennedy, FRTIB chairman, in a separate letter that Mr Trump wanted the board to “immediately halt all steps associated with investing” in the index. While Mr Scalia cannot force a reversal, he noted that Mr Trump had recently nominated three people to replace three of the five board members.
Mr Scalia said deferring the change would “enable a newly-constituted board” to determine what fund should be used instead of the MSCI index. Kim Weaver, the FRTIB spokesperson, said the board had received the two letters but declined further comment.
Anik Sen, global head of equities at PineBridge, said the Trump administration’s campaign could have broader implications for capital markets. “Federal rulings do have spin-off effects. It is likely that there will be pressure on the whole government state sector,” he said.
The White House said the Chinese companies in the MSCI index include businesses that supply the People’s Liberation Army, companies that make surveillance equipment to help China repress religious minorities and groups that violate US sanctions by dealing with Iran and North Korea.
Roger Robinson, a former National Security Council official and ex-chairman of the Congressional US-China Economic and Security Review Commission who has been pushing for action, said the White House move was significant.
“The TSP decision is of historic importance because of its vast knock-on effects for the US and global capital markets vis-à-vis China,” said Mr Robinson, who runs RWR Advisory Group, a research and risk consultancy.
“The White House letter ending this Thrift Savings Plan debacle clearly implicates the broader issues of US-sanctioned and other Chinese corporate bad actors in our capital markets and China’s non-compliance with federal securities laws,” he added.
Marco Rubio, the Florida Republican senator and China hawk, praised Mr Trump for “taking action and putting a stop to this misguided and deeply flawed decision by five unelected bureaucrats”.
Mr Rubio and Jeanne Shaheen, a New Hampshire Democratic senator, have sponsored legislation that would bar TSB from investing in Chinese companies.
Additional reporting by Colby Smith
Follow Demetri Sevastopulo on Twitter: @dimi