U.S. Markets open in 6 hrs 14 mins

Rubio Plans Bill to Block Federal Pensions Investing in China

Jenny Leonard and Ben Bartenstein

(Bloomberg) -- Senator Marco Rubio plans legislation to block U.S. government pensions from investing in Chinese stocks after the board overseeing the funds put off a decision that would add exposure to China.

The Federal Retirement Thrift Investment Board on Monday addressed concerns that switching the benchmark for its $50 billion TSP I Fund to mirror an index with Chinese assets would undermine U.S. economic and national security. A decision was delayed for at least two weeks, according to Kim Weaver, the board’s spokeswoman.

Rubio, a Republican from Florida, called the board’s move not to reverse its plan “unacceptable’’ in a statement Monday and said he would introduce bipartisan legislation “to ensure that federal retirement savings can never be a source of wealth funding the Chinese Communist Party at the expense of our nation’s future prosperity.’’

At a meeting in Washington, FRTIB’s outside consultant, Aon Hewitt, reiterated its recommendation for the fund to resemble the MSCI All Country World ex-U.S. Investable Market Index, said Weaver. China is the third-largest country weight in that index, representing about 7.5%.

The 2017 decision by the TSP board to increase U.S. government workers’ pension fund exposure to Chinese stocks -- and the debate over potentially sticking to that decision -- has come under fire from some in the Trump administration and a bipartisan group of lawmakers.

A spokesman for Rubio said the bill, which does not yet have co-sponsors, would preclude the savings plan from investing in products or stocks in countries where the Public Company Accounting Oversight Board is restricted from accessing financial accounting information.

The Chinese government has long refused to allow the PCAOB to examine audits of firms whose shares trade on the New York Stock Exchange, Nasdaq and other U.S. platforms. Alibaba Group Holding Ltd. and Baidu Inc. are among Chinese companies that have raised billions of dollars in the U.S. while avoiding PCAOB scrutiny, something the two countries have fought over for more than a decade.

Trump administration officials have been meeting to discuss the matter for several months. While limiting investment in China is being pushed by hawks inside the administration, even those who are perceived as less hardline have come around to the idea, people familiar with the internal deliberations said.

According to Weaver, the board will meet again on Nov. 13 to discuss the information presented by the outside consultant, but cautioned that it’s not certain it will reach a decision at that meeting.

Aon argued Monday that switching the benchmark would help the I Fund better match non-U.S. international equity markets and also result in a better risk return, according to documents obtained by Bloomberg. The documents also show that of the 20 largest public defined benefit plans, all of those invested in emerging-market equities have China exposure, arguing that the change to mirror the MSCI All Country World Index would be in line with other large defined contribution plans across the U.S.

Board members at the meeting asked questions including how other target date funds offer international coverage and what plan peers do or don’t do, Weaver said.

Last week, a bipartisan group of senators including Rubio and Jeanne Shaheen, a Democrat from New Hampshire, urged FRTIB Chairman Michael Kennedy again to reverse what they called a “short-sighted decision” to invest the retirement savings of civil servants and military personnel into companies tied to the Chinese government.

The Secretary of the Navy Richard Spencer in a Wall Street Journal op-ed titled “Servicemen’s Savings Shouldn’t Fund Russia and China’’ warned that a change in federal pension policy “will have perverse consequences.’’

“Imagine retiring after a long career serving in uniform, only to learn that your savings all those years had helped fund advanced weapons systems for America’s adversaries. This tragedy will soon become reality unless a decision by the Federal Retirement Thrift Investment Board is immediately reversed,’’ Spencer wrote in the Oct. 23 article.

China hawks outside the government have also pushed the board to reverse its decision and, if necessary, have the Trump administration use executive power to scuttle the move. They argue that Americans are harmed by channeling money into Chinese firms that are allegedly involved in human-rights violations and at the center of U.S. national security concerns.

The hawks illustrate the paradox of funneling money to Chinese firms and the threat it poses by citing companies like ZTE Corp., which was accused of violating Iran and North Korea sanctions, or Hikvision, which the Commerce Department this month added to an export blacklist, accusing it of being implicated in human rights violations against Muslim minorities in the country’s far-western region of Xinjiang.

To contact the reporters on this story: Jenny Leonard in Washington at jleonard67@bloomberg.net;Ben Bartenstein in New York at bbartenstei3@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Alister Bull, Brendan Walsh

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.