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POLITICO: ‘Circle the wagons’: State pension funds are dumping Chinese investments

“POLITICO: ‘Circle the wagons’: State pension funds are dumping Chinese investments ”

July 26, 2024

By Phelim Kine

Full Article HERE.

A growing number of states are forcing public employee pension funds to divest from China, pulling out of the world’s second-largest economy because of hostility toward Beijing and fear that U.S. assets could be frozen if conflict breaks out in the Indo-Pacific.

Five states — Indiana, Florida, Missouri, Oklahoma and Kansas — have directed state fund administrators to begin the divestment process over the past year. And more are considering doing so — the latest sign of deteriorating relations between the U.S. and China.

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Divestment also may make economic sense — the value of China’s stock index hit a five year low in February and Chinese policymakers failed to produce a credible roadmap to an economic rebound at a high-level meeting in Beijing last week.

But excluding Chinese investments from pension funds could be short-sighted. U.S. state pension fund managers “risk missing a potential bounce back if they let asset allocation be clouded by America’s pervasive anti-China sentiment,” said Stephen Roach, an economist and former chair of Morgan Stanley Asia.

Indiana passed its law last year barring investing in entities “controlled by the People’s Republic of China or the Chinese Communist Party” and state pension funds have begun divesting. Indiana lawmakers said their concerns included China’s intellectual property right violations and espionage operations.

In Oklahoma, Gov. Kevin Stitt announced a series of measures last month aimed at shielding state tax dollars “from Chinese Communist Party aggression.” He ordered relevant agencies to draft divestment plans to protect state assets, including retirement funds, that could be vulnerable if Chinese leader Xi Jinping were to invade Taiwan or otherwise foment conflict in the Indo-Pacific.

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The fraught state of U.S.-China relations also makes divestment a political winner with voters on both sides of the aisle. According to a Pew Research Center survey last year, 83 percent of Americans have “negative views” of China, and 4 in 10 Americans describe China as “an enemy” of the United States.

“China is not favorably perceived in Missouri,” said Missouri State Treasurer Vivek Malek, who led efforts to pull the state’s pension funds out of China last year. He is facing a hotly contested primary next month ahead of state elections in November and invoking the move in his campaign. An ad he released this week declares “China is a threat — they get no money from us.”

Perceptions of a wider threat that China poses to U.S. national security — including cyberattacks on U.S. infrastructure — is also a factor for Malek. In Florida and Kansas, part of the motivation has come from concerns about China’s human rights record — particularly allegations of genocide targeting Uyghurs and other largely Muslim ethnic groups in Xinjiang. Others cite Beijing’s role in fueling the U.S. opioid overdose epidemic.

State pension funds currently hold between 1 percent to 5 percent of their funds in Chinese investments, according to a January report by Future Union, a nonprofit organization that advocates for diverting private sector investment from authoritarian countries to democracies, and is funded and led by venture capitalist Andrew King. Data compiled by Future Union shows that state pension funds invested $68 billion in China from 2021 through 2023. The move toward divestment “isn’t a fast trend … but I think there are other [states] that are coming,” King said.

Missouri sees the divestment as “a defensive measure,” said State Treasurer Malek. “When Ukraine was invaded by Russia, our investments in Russia tanked and we do not want anything like that to happen with China, especially when our own intelligence has reported that China may be considering invading Taiwan,” Malek said.

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The bill prompted a partisan split — Kansas Gov. Laura Kelly, a Democrat, refused to sign it due to concerns about unspecified “unintended consequences” — a symbolic act that did not block its passage. Kelly didn’t respond to a request for comment.

Lawmakers who supported the bill said it would have minimal financial impact. The slowing in China’s economy had already prompted the Kansas pension fund to proactively start moving money out of those holdings.

“Our numbers showed us that the fiscal hit to our fund would be negligible,” Hoheisel said.

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Florida’s law, passed in May, requires the agency that administers its pension fund to unveil a plan by September to dump Chinese investments and complete the divestment within a year. That legislation cites concerns about Beijing’s human rights record and economic policies. The Florida state pension fund’s China investments stood at $174 million in May, a fraction of the fund’s total $200 billion.

Taxpayers and state lawmakers alike didn’t want to “invest into a country that’s not being totally transparent or hasn’t the best interests of Floridians at heart,” said Florida’s Chief Financial Officer Jimmy Patronis.

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About CFO Jimmy Patronis

Chief Financial Officer and State Fire Marshal Jimmy Patronis is a statewide elected official and a member of Florida’s Cabinet who oversees the Department of Financial Services. CFO Patronis works each day to fight insurance fraud, support Florida’s firefighters, and ensure the state’s finances are stable to support economic growth in the state. Follow the activities of the Department on Facebook (FLDFS) and X (@FLDFS).