🎙️ Voice is AI-generated. Inconsistencies may occur.
For the last several years, the annual threat assessment report by the Director of National Intelligence (DNI) has listed China as our scariest rival. They don't use the word "scary," but the takeaway is that no one can outcompete the U.S. on every level—economic, financial, soft power, and maybe even militarily (though not yet)—like China. On coveted green technologies like solar, wind and EV batteries, they have us beat in spades and everyone knows it. On May 14, Biden announced new import duties on China-sourced EVs and solar, for example, which begin August 1.
Here's how the DNI sees China, from their March 2024 report: "China has the capability to directly compete with the United States and U.S. allies and to alter the rules-based global order in ways that support Beijing's power and form of governance over that of the United States. China's serious demographic and economic challenges may make it an even more aggressive and unpredictable global actor."
How did China get there so fast?
American multinationals made China the world's go-to manufacturing hub for at least a generation. The trend was ramped up in December 2001 when China became a member of the World Trade Organization.
For those old enough to know Ross Perot and his "giant sucking sound" comment pre-NAFTA in 1992, his prediction came to fruition nine years later. MIT economists called it the China Shock.
In many ways, Wall Street is now helping to fund a China Shock 2.0. Big investment firms spent many years trying to convince China to open its securities market. They succeeded. Some asset managers set up shop in China or built partnerships with Chinese banks to become asset managers there.
Giant investment firms, led by BlackRock, throw untold billions into the Chinese Frankenstein monster economy the DNI and much of Capitol Hill is so worried about. This is ongoing.
Both Trump and Biden banned investors from owning dozens of Chinese defense contractors in 2020 and 2022. Investors complied, selling those positions.
There are many more companies still available, and they include companies that the State Department sanctioned and the Defense Department deemed unworthy of U.S. defense contracts. They are all investable. Companies on those entity lists were not banned from investors.
As one example, a company called Hoshine Silicon Industries, which makes polysilicon for solar and semiconductor equipment based in the Uyghur Muslim province of Xinjiang, is still owned by BlackRock, according to Morningstar. You can't buy anything made with the help of Hoshine in the U.S., but you can own their Shanghai listed stocks.
On May 1, the Coalition for a Prosperous America, where I work as an analyst, released a report called "Case Study for Congress: BlackRock & MSCI: How Wall Street's Offshore Companies Fund the CCP & PLA". The report shows how BlackRock and MSCI, an index provider, enable U.S. investors to easily invest in non-restricted Chinese military companies and companies sanctioned by the government.
BlackRock invests in about 30 subsidiaries of Chinese defense contractors that have been banned since 2022 by the Treasury Department. In addition, BlackRock funds domiciled outside the U.S. hold 14 banned Chinese defense companies that American persons may not legally buy or sell—but BlackRock is not restricted in that case because these are Asian banks selling to Asian clients, so no American money is at work there; only an American fund is facilitating the investment.
In the U.S., BlackRock is invested in commercially blacklisted companies not yet facing capital market restrictions by Treasury, because the index they track for their iShares exchange traded funds—the MSCI Emerging Markets Index, to name just one of them—includes these names.
This is the largest strategic financial scandal in the history of the dueling powers, whereby the U.S., to the tune of trillions of dollars over time, is underwriting its leading adversary. The commercial strength of China is supported by us.
In April, the House Select Committee on the CCP found that financial institutions invested roughly $6.5 billion in 63 Chinese companies on a State Department or Defense Department blacklist. BlackRock invested at least $1.9 billion in these companies, the report said.
"The big Wall Street firms aren't going to remove these Chinese military companies on their own; there's too much money at stake," said Justin Bernier, founding partner of AllSource Investment Management.
Worth noting, BlackRock has a joint venture with China Construction Bank, a Big Four China state owned bank, to help them tap into the mutual fund market in China. BlackRock will comply with U.S. law, but surely never advocate for capital market restrictions against them.
BlackRock buys anything with a ticker symbol, though the House and Senate are trying to ban them from buying anything with a ticker symbol in Shanghai and Shenzhen in a bipartisan effort. Rep. Brad Sherman (D-CA-32) teamed up with Rep. Victoria Spartz (R-IN-5) to ban Shanghai and Shenzhen listed shares from U.S. indexes. If that passed, it would kill the MSCI China A-Shares Index and all the billions of dollars in ETFs that are pegged to it.
Vanguard and its index provider FTSE are no different. They are also invested in Chinese defense contractors not yet banned by Washington. Like BlackRock, despite the bad look, they have not given up on Chinese defense stocks, including subsidiaries of banned companies and sanctioned ones.
But it's not their money they're investing. It's yours.
Kenneth Rapoza covered the BRIC countries for Forbes from 2011 to 2023 and is a former WSJ reporter in Brazil. He is an analyst for the Coalition for a Prosperous America.
The views expressed in this article are the writer's own.
