On Monday, May 11th, Labor Secretary Eugene Scalia asked the Federal Retirement Thrift Investment Board board to change course on plans to move the I fund to the Morgan Stanley Capital International All Country World Ex-U.S. Investable Market Index (MSCI ACWI ex-USA IMI).
“At the direction of President Trump, the board is to immediately halt all steps associated with investing the I fund according to the MSCI ACWI ex USA IMI, and to reverse its decision to invest plan assets on the basis of that international equities index,” Scalia said in a letter to FRTIB Chairman Michael Kennedy. This change which specifically excludes China - Chinese companies and equities - has largely flown under the radar due to the super-fast news cycle these days. It is worth the time to take a deeper look at the significance here.
The great power Cold War face-off ended with America’s dominance intact largely because the U.S.’s stance was far more assured than that of the European powers. That is to say, while European powers such as Germany, followed Ostpolitik, a belief that commercial bridge-building with the USSR via financing would lead to geopolitical cooperation, Reagan, and the US slowed and ultimately terminated the flow of money to the Soviets.
In the early 1980s, the USSR’s spending was $16 billion more than their income so like China today, they relied on funding from Western governments and banks to fill this gap. President Reagan was not prepared to sanction US loans and revenue which would enable the Soviets to expand, build up the nuclear stockpile, and undertake anti-Western campaigns, so he cut off all funds.
One way this happened was shuttering the Siberian Gas Pipeline project connecting Siberia with the Western European gas grid. This had the potential to build up Soviet income and since France and Germany considered the USSR a less developed country, it would be suitable for subsidized, below the market interest rates. Taking advantage of the monopoly it had on technology that drilled through permafrost in arctic conditions, as used in Alaska, the U.S. placed oil and gas equipment sanctions on the USSR and European companies that were helping to build the Siberian pipeline. It then closed its market entirely to companies that continued to supply the pipeline. Four out of six of these companies went bust, and the Europeans realized that they could do business with the Soviets, or the US, not both.
An additional US-Saudi deal to pump 2 million extra oil barrels a day into the market brought down the oil price, and was also significant because every dollar wiped from the price of a barrel of oil cost the USSR $500m - $1bn in revenue. Eventually, the USSR defaulted on $96bn in Western hard currency debt and the Soviet empire completely collapsed.
This example perfectly mirrors the direction Trump administration has taken towards China, whereas previous U.S. Administrations are more comparable to the pacifying European powers in how they dealt with the Soviets. As President Trump told President Xi while discussing the unfair imbalance in US-China trade, “in all fairness, I don’t blame China. I blame the people (U.S. Presidents) that stood here before me.”
The Growing Chinese Influence
Several revelations have shown how previous US support contributed to strides made by China in its effort to become the world’s leading power. One, the “Belt and Road Initiative,” puts a lot of countries, India, the Middle East, and Europe under Chinese influence, and to some extent, control, via development in exchange for trade dependence. According to the “New Silk Road Project,” it will help “help China export its overcapacity, forge new export markets for China's construction and engineering companies and foster global trade relations through outbound state financing on an unprecedented scale.”
The accompanying “Made in China 2025” initiative aims for China to dominate technology development in key areas like artificial intelligence, 5G, hypersonic weapons technology, and quantum computing. At the same time, we have had revelations of Chinese cheating and deceit – as well as forcing American companies to share research and trade secrets to do business in China.
The Oreo case from 2014 saw federal prosecutors charge Walter Liew with conspiring to steal “Oreo cookie” technology over the course of 14 years for the benefit of Chinese chemical manufacturers. Although not commonly known, the white Oreo cream filling in the popular Nabisco cookie uses a highly valuable chemical - titanium dioxide (TiO2) to achieve that brilliant white color. Auto paint and hundreds of other industrial products use TiO2 too and it was produced through a multi-stage process by American manufacturer DuPont. According to federal prosecutors, beginning in 1991, Liew met senior Chinese Communist Party official Luo Gan, who began to send him “directives” describing China’s industrial aims, and a 20-year relationship “of lying, cheating, and stealing” of this chemical technology began.
Liew had gained the confidence of two retired American Dupont engineers, Tim Spitler and Robert Maegerle through charm and monetary gifts. They gave him information, sketches, and blueprints of DuPont titanium dioxide facilities and processes. This information was then used by Liew to secure contracts totaling $28 million from China’s Pangang Group to build a TiO2 production facility. During the trial, Tim Spitler admitted to receiving a $15,000 payment from Liew. He later committed suicide. Liew was convicted and sentenced to 15 years for economic espionage, possession of trade secrets, and tax fraud. This type of theft is taking place in multiple important industries and approximates $250 billion a year.
The Chinese clandestine infiltration of American Universities is also huge. Last week, a Harvard University professor, Charles Lieber, was indicted on charges of making false statements about his ties to a Chinese-run recruitment program. Lieber, former chair of the department of chemistry and chemical biology at Harvard was arrested in January on allegations that he hid his involvement in China's Thousand Talents Plan which recruits people with knowledge of foreign technology and intellectual property to China. The U.S. Department of Justice says Lieber was paid $50,000 a month by the Wuhan University of Technology in China under a Thousand Talents Program contract and awarded more than $1.5 million to establish a research lab at the Chinese university. They say Lieber agreed in kind, to apply for patents, and do other work on behalf of the Chinese university. The case is ongoing.
Likewise, the sway China has via lobbying has become apparent when the NBA cowed into submission after Houston Rockets General Manager Daryl Morey commented on Chinese repression of the freedom movement in Hong Kong. Within a week, the NBA had called Morey’s tweets “regrettable” and Morey apologized for offending China. NBA Basketball has become more popular in China and now earns $4 billion annually from television deals, merchandise sales and sponsorships there. When several Chinese vendors suspended their contracts with the Rockets, the NBA chose to bend the knee so to speak in submission to Chinese demands.
The Thrift Savings Plan Announcement
China has over 700 companies in the U.S. stock and bond markets, 86 are listed on the New York Stock Exchange. Not all are good actors. Take Hikvision, a China company which makes facial recognition technology that identifies and monitors the movement of the Uyghurs in China. It also manufactures the surveillance cameras used on the grounds of Chinese concentration camps holding up to 2 million Uyghurs. Hikvision and its parent company are both on the U.S. Commerce Department Entity list, referred to as a “Blacklist.” Unbelievably American investors and even ordinary Americans putting money into their retirement or investment accounts are unwittingly funding companies that contribute to the maintenance of Chinese concentration camps. Similarly, companies like AVIC who make weapons systems for the Chinese People’s Liberation Army (PLA), who contribute to the militarization of islands in the South China Sea, or whose employees have been indicted for cyber-crime or espionage are being funded by US investors.
It is estimated that the Chinese have secured nearly $2 trillion of American investment in equities. China badly needs US dollars for its economic goals, and Americans are ending up with a percentage of their investment and retirement accounts in Chinese securities as a result. The danger here is the potential that millions of Americans may end up with a vested financial interest in opposing future sanctions or penalties against China, regardless of any security threat it poses. This is how China is trying to outwit the U.S. and prevail economically.
Consider the following examples of exposure. The University of Michigan, whose investment portfolio is similar to other U.S. universities, has 44% of its $12.2billion assets in private equity and venture capital, one – third of the investments in the venture capital portion are Chinese. The Californian State teachers’ Retirement System too, the largest educator-only pension fund in the world, own Chinese Sovereign bonds valued at over $4 million. Ironically, it was their opposition to Trump’s immigration policy which led them to divest from American companies that operate U.S. private prisons, only to end up funding companies that build the tech to secure Chinese Concentration camps.
The recent Trump administration's decision to halt this funding of Chinese companies focuses on the U.S. taxpayer's money used in the retirement program for all federal employees known as the Federal Thrift Savings Plan (TSP). Its value is about $578 billion and has approximately 5.7 million enrollees. Up until November 2017, the TSP was using a Morgan Stanley Capital Investment Index that consisted of only companies in developed industrialized democratic countries. Acting on a recommendation from a Wall Street consulting firm, Aon Hewitt Investment Consulting, it decided to start moving the TSP international fund to the MSCI All Country World Index, which includes China, from July 2020.
Fortunately, this decision has been reversed, but it is still imperative that the U.S. prudently exclude dubious Chinese actors from accessing U.S. funding. Though one might ask: are any Chinese companies “good actors” when we consider that the Chinese government can order any commercial China company to commit espionage, steal technology or other actions to support their national interest? This is stated in Article 7 of the National Intelligence Law of China.
Just as it had a monopoly on the drilling equipment for oil and gas in harsh climates in the 1980's, the U.S. has most of the world’s money, and the power to direct where it goes today. China by comparison has such an avid need for dollars and funding that there is no other country big enough for them to turn to. Trump has the leverage to win this economic and capital battle, by shoring up vulnerabilities and not playing into China’s hands.
Carol King received a first class BA (honors) in History and Politics from Stirling University, along with an exceptional commendation for a study on US public opinion and Foreign Policy. She also completed a year of study at University of London before taking up a Graduate Proctor Fellowship at Princeton University. She further completed a MPhil in American Politics at Dundee University. Aspiring to be a writer/commentator on American politics, she now writes for UncoverDC.