70 per cent of Chinese companies with military ties included in major global securities indices, State Department says
- Many major stock and bond indices developed by index providers like MSCI and FTSE include malign Chinese companies, State Department says
- While it is understood to be a political move, it may add pressure on the global indices to take action on these firms, says Louis Tse of Wealthy Securities
At least 70 per cent of Chinese companies previously identified by the United States government as having ties to the Chinese military have affiliates whose securities are included on major stock indices, with money from US investors supporting these companies involved in both civilian and military production, the State Department said on Sunday.
As of June, 22 of 31 firms with Chinese military ties had at least 68 distinct affiliated companies whose shares were included on major benchmarks, the State Department said.
“The Chinese Communist Party’s threat to American national security extends into our financial markets and impacts American investors,” the State Department said. “Many major stock and bond indices developed by index providers like MSCI and FTSE include malign People’s Republic of China (PRC) companies, listed on the Department of Commerce Entity List and/or the Department of Defense List of Communist Chinese military companies.”
The State Department said that China National Chemical Corporation and China Communications Construction Company were among the 22 firms that have affiliates included in the MSCI Emerging Markets Index, FTSE Emerging Index and Bloomberg Barclays Global Aggregate Index.
The money flowing into these index funds – often passively, by US retail investors – supports Chinese companies involved in both civilian and military production, the State Department said.
“It is a political move,” said Louis Tse, managing director of Wealthy Securities. “To a certain extent, it may add pressure on the global indices to take action on these firms.”
Tse said that that it remains to be seen whether Biden will follow Trump’s policy whose term ends on January 20.
On Sunday, the State Department also said at least 13 Chinese firms previously added to the US Commerce Department’s so-called entity list had affiliates or parent companies included in MSCI or FTSE Russell stock indices. The entity list – also known as a blacklist – prohibits the export of protected US technology to designated companies without first obtaining a licence from the US government.
The index provider, an arm of the London Stock Exchange Group, said it would remove the companies, including China Railway Construction Corporation, surveillance camera maker Hangzhou Hikvision and supercomputer manufacturer Dawning Information or Sugon, from its FTSE Global Equity Index Series (GEIS), its FTSE China A Inclusion indices and associated indices beginning on December 21, following its quarterly index review.
The move is negative for companies identified by the State Department and they are likely to suffer from fund outflows and their share prices are likely to underperform going forward, said Alex Wong, director of asset management at Ample Capital.
“Other Chinese companies, especially those focusing on domestic business, have a low political risk,” said Wong. “It’s not an across-the-board move targeting all Chinese companies yet.”
