U.S. Investors Are Funding Malign PRC Companies on Major Indices

“Under Xi Jinping, the CCP has prioritized something called ‘military-civil fusion.’ … Under Chinese law, Chinese companies and researchers must – under penalty of law – share technology with the Chinese military. The goal is to ensure that the People’s Liberation Army has military dominance. And the PLA’s core mission is to sustain the Chinese Communist Party’s grip on power.”

– Secretary of State Michael R. Pompeo, January 11, 2020

The Chinese Communist Party’s threat to American national security extends into our financial markets and impacts American investors. 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 money flowing into these index funds – often passively, by U.S. retail investors – supports Chinese companies involved in both civilian and military production. Some of these companies produce technologies for the surveillance of civilians and repression of human rights, as is the case of Uyghurs and other Muslim minority groups in Xinjiang, China, as well as in other repressive regimes, such as Iran and Venezuela.

As of June 2020, at least 22 of the 31 parent-level PRC military companies had affiliates’ securities included on a major securities index, including at least 68 distinct affiliate-level securities issuers; at least 13 PRC firms on the Entity List had affiliates or parent companies included in the MSCI or FTSE stock indices; and the MSCI emerging market index included 230 A-shares Chinese stocks incorporated on the mainland, quoted in renminbi, and listed on Chinese Communist Party-controlled Shanghai and Shenzhen exchanges.

PRC Military Companies on MSCI and FTSE

“Some of the Chinese companies (on MSCI Index) present significant national security and humanitarian concerns for the United States which increases the risk that they could be subject to sanctions, public protests, trade restrictions, boycotts, and other punitive measures that jeopardize their business and profitability. For example, military contractors that provide military aircraft and telecommunications support to the People’s Liberation Army. The list also includes companies that manufacture surveillance equipment that China uses to oppress religious minorities as well as one company indicted for engaging in economic activity with Iran and North Korea in violation of U.S. sanctions law.”

– Robert C. O’Brien, National Security Advisor, and Lawrence Kudlow, Director, National Economic Council, May 11, 2020

Parent-Level PRC Military Companies with Affiliates’ Securities Included on Major Indices

PRC Military Company Exchange Jurisdictions Listing AffiliatesMSCI EM Stock IndexFTSE Emerging Stock IndexBBGA Bond Index
Aviation Industry Corporation of ChinaHong Kong, Mainland PRC, Austria, GermanyXXX
China Aerospace Science and Technology Corporation
China Aerospace Science and Industry Corporation
China Electronics Technology Group Corporation
China South Industries Group Corporation
China State Shipbuilding CorporationHong Kong, Mainland PRCXX
China Shipbuilding Industry CorporationHong KongX
China North Industries Group CorporationHong KongX
Hangzhou Hikvision Digital Technology CoHong Kong, Mainland PRCXX
Huawei Technologies
Inspur GroupHong Kong, Mainland PRCXX
Aero Engine Corporation of ChinaMainland PRCXX
China Railway Construction CorporationHong Kong, Mainland PRCXXX
Panda Electronics Group
Dawning Information Industry CoHong Kong, Mainland PRCXX
China Mobile Communications GroupMainland PRCXX
China National Nuclear CorpMainland PRCXX
China Telecommunications CorpHong KongXX
CRRC CorpHong Kong, Mainland PRCXX
China General Nuclear Power CorpMainland PRCXXX
China Communications Construction CompanyHong Kong, Mainland PRCXXX
China Academy of Launch Vehicle Technology
China SpacesatMainland ChinaXX
China United Network Comminications GroupHong Kong, Mainland ChinaX
China Electronics Corporation
China National Chemical Engineering Group CoMainland ChinaX
China National Chemical CorporationHong Kong, Mainland ChinaXXX
Sinochem GroupMainland ChinaXX
China State Construction GroupHong Kong, Mainland ChinaXXX
China Three Gorges CorporationX
China Nuclear Engineering & Construction Corporation

Affiliate-Level PRC Military Company Stocks Included on Major Indices

Security NameMSCI China A IndexMSCI EM IndexMSCI ACWI IndexFTSE Emerging IndexFTSE All-

World Index

AviChina Industry & Technology Co., Ltd.XXXX
AVIC International Holdings Ltd.
AVIC International Holding (HK) Ltd.
AVIC Aircraft Co., Ltd.XXXXX
AVIC Capital Holdings Co., Ltd.XXX
AVIC Heavy Machinery Co., Ltd.XX
AVIC Electromechanical Systems Co., Ltd.XXXXX
AVIC Jonhon Optronic Technology Co., Ltd.XXXXX
AVIC Shenyang Aircraft Co., Ltd.XXXXX
AVIC Sanxin Co., Ltd.
AviCopter Plc. (AVIC Helicopter)XXX
AVIC Aviation High-Technology Co., Ltd.
AVIC Jiangxi Hongdu Aviation Industry Group (HAIG)
China Avionics Systems Co., Ltd.XXXXX
Xi’an ChenXi Aviation Technology Corp., Ltd.
Rainbow Digital Commercial Co., Ltd.XX
Xiamen Tianma Microelectronics Co., Ltd.XXXXX
Shennan Circuit Co. Ltd.XXXXX
Sichuan Chengfei Integration Tech Corp.
Harbin Dongan Auto Engine Co., Ltd
Guizhou Guihang Automotive Components Co. Ltd.
China Merchants Property Operation & Service Co., Ltd. (CMPO)XXXXX
FIYTA Precision Technology Co., Ltd.
AECC Aero Engine Control Co., Ltd.XXXXX
AECC Aviation Power Co., Ltd.XXXXX
AECC Aero Science & Technology Co., Ltd.
China Aerospace Times Electronics Co., Ltd. (CATEC)XXXXX
China Aerospace International Holdings Limited (CASIL)
Aerospace CH (Cai Hong/Rainbow) UAV Co., Ltd.
Shaanxi Aerospace Power Hi-Tech Co., Ltd.
Aisino Corp., Ltd.XXXXX
Guizhou Space Appliance Co., Ltd.
Aerosun Corp.
Aerospace Communications Holdings Co., Ltd. (Aerocom)
Beijing Aerospace Changfeng Co., Ltd. (ASCF)
ZTE Corp. (SZ)XXXXX
ZTE Corp. (HK)XXXX
Anhui Sun-Create Electronics Co., Ltd.
Hangzhou Hikvision Digital Technology Co., Ltd.XXXXX
Shanghai East-China Computer Co., Ltd. (SHECC)
Chengdu Westone Information Industry Inc.XXXXX
Chengdu Spaceon Electronics Co., Ltd.
Guangzhou GCI Science & Technology Co., Ltd.
Glarun Technology Co., Ltd.
Taiji Computer Co., Ltd.XX
Phoenix Optics Co., Ltd.
CETC Energy Joint-Stock Co., Ltd.
Jiangling Motors Corporation Ltd. (JMC)XX
Chongqing Changan Automobile Co., Ltd.XXXXX
Baoding Tianwei Baobian Electric Co., Ltd. (BTW)
Chongqing Jianshe Vehicle System Co., Ltd.
Yunnan Xiyi Industrial Co., Ltd.
China Shipbuilding Industry Group Power Co., Ltd.XXXXX
China Marine Information Electronics Co., Ltd. (CMIE)
CEC CoreCast Corp. Ltd.
China Harzone Industry Corp., Ltd.
China CSSC Holdings Ltd.XX
CSSC Offshore and Marine Engineering (Group) Co., Ltd. (SS)XX
CSSC Offshore and Marine Engineering (Group) Co., Ltd. (HK)XX
CSSC Science and Technology Co., Ltd.
CSSC (Hong Kong) Shipping Co., Ltd.
Shanghai Jiangnan Changxin Heavy Industry Co., Ltd. (SCJ)
Norinco International Cooperation Ltd.
North Navigation Control Technology Co., Ltd.
North Industries Group Red Arrow Co., Ltd.XX
Inner Mongolia First Machinery Group Co., Ltd. (FIRMACO)XXXXX
Inner Mongolia North Hauler Joint Stock Co., Ltd.
North Huajin Chemical Industries Co., Ltd.XX
North Electro-Optic Group Co., Ltd. (Sicong Group or NEO)
Sichuan Nitrocell Co., Ltd.
Changchun Yidong Clutch Co., Ltd.
Lingyun Industrial Co., Ltd.
Jinxi Axle Co., Ltd.
AKMIndustrial Ltd.
Inspur International Ltd.
Inspur Software Co., Ltd.
Inspur Electronic Information Industry Co. Ltd.XXXXX
China Railway Construction Corporation Ltd. (CRCC) (SS)XXXXX
China Railway Construction Corporation Ltd. (CRCC) (HK)XXXX
CRRC Corporation Ltd. (SS)XXXXX
CRRC Corporation Ltd. (HK)XXXX
Zhuzhou CRRC Times Electric Co., Ltd.XXXX
Dawning Information Industry Co., Ltd. (Sugon)XXXXX
China Mobile Ltd. (NYSE)
China Mobile Ltd. (HK)XXXX
CGN Power Co., Ltd. (SZ)XX
CGN Power Co., Ltd. (HK)XXXX
CGN New Energy Holdings Co., Ltd.
CGN Nuclear Technology Development Co. Ltd.
China Telecommunications Corp. Ltd. (HK)XXXX
China Telecommunications Corp. Ltd. (NYSE)
China Communications Construction Company, Ltd. (HK)XXXX
China Communications Construction Company, Ltd. (SS)XXXXX
Shanghai Zhenhua Heavy Industries Co., Ltd. (ZPMC)XX
CCCG Real Estate Corp. Ltd. (CREC)
Greentown China HoldingsXX
Greentown Service GroupXX
China Energine International (Holdings) Ltd.
China Spacesat Co., Ltd.XXXXX
China Unicom (Hong Kong) Ltd. (HK)XXXX
China Unicom (Hong Kong) Ltd. (NYSE)
China United Network Communications Ltd.XXXXX
China Electronics Huada Technology Co., Ltd.
China National Software & Service Co., Ltd. (ChinaSoft)XX
Chinasoft International Limited (CSI)
Nanjing Panda Electronics Co., Ltd.
Nanjing Panda Electronics Co., Ltd.
Amoi Electronics Co., Ltd.
Shenzhen SED Electronics Group Co., Ltd
Shanghai Belling Co., Ltd.
Shenzhen Kaifa Technology Co., Ltd.XXXXX
Nanjing Huadong Electronics Information & Technology Co., Ltd.
TPV Technology Co., Ltd.
China Zhenhua (Group) Technology Co., Ltd.
Solomon Systech (International) Limited
China Greatwall Technology Group Co., Ltd.XXXXX
IRICO Group New Energy Co., Ltd.
IRICO Display Devices Co., Ltd.
China Electronics Optics Valley Union Holding Co., Ltd.
China Electronics Huada Technology Co., Ltd.
China National Chemical Engineering Group Co., Ltd. (CNCEC)XXXXX
Syngenta AG
Haohua Chemical Science & Technology Co., Ltd.
China BlueStar Shenyang Chemical Co., Ltd.
Cangzhou Dahua Co., Ltd.
Adama Agricultural Solutions Co., Ltd.XX
KraussMaffei Group
Bluestar Adisseo Co., Ltd.XX
Aeolus Tyre Co., Ltd.
Pirelli & C. SpAXX
Elkem ASA
Sinochem International (Holding) Co., Ltd.XX
Sinofert Holdings Ltd.
China Jinmao Holdings Group Ltd.XXXX
Far East Horizon Co., Ltd.XXXX
China State Construction Engineering Corporation Ltd. (CSCECL)XXXXX
China State Construction International Holdings Ltd.XXXX
China West Construction Co., Ltd.XX
China Overseas Land and Investment Ltd. (COLI)XXXX
CSCEC Scimee Science & Technology Co., Ltd.
China Overseas Grand Oceans Group Ltd.
China Overseas Property Holdings Ltd. (COHL)XX
China State Construction Development Holdings Ltd.
Chongqing Three Gorges Water Conservancy & Electric Power Co.
China Yangzte Power Co., Ltd.XXXXX
Hubei Energy Group Co., Ltd.XXXXX
China Nuclear Engineering & Construction Corporation Ltd. (CNECC)
China National Nuclear Power Co., Ltd. (CNNP)XXXXX
SUFA Technology Industry Co., Ltd.
CNNC International Group

PRC Entity List Companies on MSCI and FTSE

Thirteen PRC firms placed on the Department of Commerce Entity List for provision of equipment used to violate Uyghur human rights in Xinjiang, among other reasons, are affiliated with nine distinct publicly traded PRC firms that are included on the MSCI and/or FTSE stock indices. Hangzhou Hikvision, IFLTEK, Fiberhome, and Dahua are prominent examples of PRC firms with widely recognized ties to the oppression of Uyghurs that benefit from inclusion in the MSCI and/or FTSE stock indices.

Publicly Traded FirmEntity List AffiliatesMSCI Index FTSE Index
China National NuclearAffiliate: Baotou Guanghua Chemical Industrial CorporationXX
Hangzhou Hikvision Digital Technology Co.Hangzhou Hikvision Digital Technology Co.XX
China Communications Construction Company5 Affiliates, China Communications Construction Company: Dredging; Guangzhou Waterway; Second Navigation Engineering; Shanghai Waterway; Tianjin WaterwayXX
China Shipbuilding GroupAffiliate: China Shipbuilding Group 722nd Research InstituteXX
Guangzhou Haige Communication GroupGuangzhou Haige Communication GroupXX
Zhejiang DahuaDahua TechnologyXX
IFlyTek CoIFLYTEKXX
FiberHome TelecoFiberHome Technologies GroupXX
Xiamen Meiya Pico Information Co. Ltd.Xiamen Meiya Pico Information Co. Ltd.X

PRC Entity List Companies on the New York Stock Exchange (NYSE)

  • China Telecommunications Corp.
  • China Mobile Communications Group

Both companies are considered PRC military companies by the Department of Defense.

PRC stocks directly affect the pension assets of American workers and retirees

  • There are 3,992 public pension systems in the United States, according to the United States Census Bureau.
  • 231 of these public pension systems are state-level programs, while the remaining 3,761 are local.
  • $10.7 trillion invested in the private pension plans is covered by the Employee Retirement Income Security Act (ERISA).

The Thrift Savings Plan’s governing board study revealed that a majority of pension funds use the MSCI emerging market index as their investment guide, including:

  • The 401k’s of all 10 largest publicly traded U.S. companies, including firms like Apple and Microsoft
  • All 10 of the top federal contractors
  • All 20 of the largest state pension plans
  • All six of the largest target-date mutual-fund providers
  • The Pension Benefit Guaranty Corporation (PBGC)
    • ($133 billion in pension insurance reserves)
  • Numerous Insurance Funds
  • Numerous University and College Endowment Funds

Institutional investors and endowment managers can and should pay attention to these risks

“Under Secretary Krach sent a letter recently to the governing boards of American universities, alerting them to the threats the Chinese Communist Party poses to academic freedom, to human rights, and to university endowments. These threats can come in the form of illicit funding for research, intellectual property theft, intimidation of foreign students, and opaque talent recruitment efforts.

“University governing boards can help ensure their institutions have clean investments and clean endowment funds by taking a few key steps:

  • Disclose all PRC companies invested in endowment funds, especially those in emerging-market index funds.
  • Divest from Chinese companies on the Commerce Department Entity List that are contributing to human rights violations, military coercion, and other abuses.
  • And simply understand the recommendations issued by the President’s Working Group on Financial Markets, which examined the risk to investors of Chinese companies that are listed on U.S. stock exchanges.”

– Secretary of State Michael R. Pompeo, September 2, 2020

Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies: https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-securities-investments-finance-communist-chinese-military-companies/

Letter from Under Secretary of State Keith Krach to Business Leaders on Xinjiang Supply Chain Business Advisory urging financial institutions’ boards to divest from companies that contribute to human rights violations: https://www.state.gov/Letter+from+Under+Secretary+of+State+Keith+Krach+to+Business+Leaders+on+Xinjiang+Supply+Chain+Business+Advisory

Letter From Under Secretary Keith Krach to the Governing Boards of American Universities urging endowment funds to divest from companies that are on the Entity List or that contribute to human rights violations:

https://www.state.gov/letter-from-under-secretary-keith-krach-to-the-governing-boards-of-american-universities

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