Explainer: Preventing State Pension Funds and Endowments from Funding China

Is Your State Providing Financing and Support for the CCP and Their Companies?

What to Ask and How to Stop Financing America’s Leading Adversary Through State Pension Funds and University and College Endowments



States are unwittingly investing in the CCP and their bad actor companies through their retirement systems and endowments. These financial contributions – through indexes, ETFs, mutual funds, and other investment products – provide capital for the CCP’s military and malign influence operations. While we work hard at home to stop the CCP from undermining our freedoms and way of life, we must also be sure we are not financing them, increasing their capacity to get closer to an invasion of Taiwan, and providing them the very tools to threaten and destroy our way of life – all through America’s investible capital.

One poignant example of the types of companies we are concerned about is that of China State Shipbuilding Corporation Holdings Limited (CSSC Holdings Ltd.).

  • The S. Department of Defense officially designated CSSC a Communist Chinese Military Company.
  • They are a subsidiary of defense contractor supplying warships to the People’s Liberation Army Navy.
  • CSSC built the third and largest Chinese aircraft carrier, launched in June 2022.
  • China CSSC Holdings is held in large index funds available to everyday investors via mutual funds.



Each state must adopt a policy to stop investing – through pension funds and endowments – in countries of concern like China. The risks are very high for investors due to geopolitical and other factors, and the harms done to national security, U.S. economic security, human rights, and other interests are too great.


State leaders must:

  • Ask questions about what state policies currently exist and who has authority over state retirement, pension, endowment, and other investible capital. This means understanding who fiduciaries are, who the decision-makers are, and what authority elected and appointed officials have. This also applies for those public servants or private firms obligated to oversee state investments.
  • Understand current investment profiles and portfolios for state accounts to assess your state’s risks and request information through letters and hearings if necessary.
  • Determine top concerns for your state and areas of greatest risk that must be immediately reduced to protect the stability and integrity of your state’s investment accounts.
  • Learn from other states on what they have done successfully and what their methodology has been. One great state to start with is the State of Tennessee for retirement accounts. Other states have been grappling with university and college endowments, but no perfect solution yet exists for state retirements or endowments.
  • Pass laws that require investment policy changes to how state investment managers and fiduciaries approach international and emerging markets investment allocations. 


TENNESSEE – A model to follow

The TCRS has a 5% allocation to emerging market country equities. Staff uses the Democracy and the Corruption Perceptions rankings to create a combined percentile score of world countries. A 50-percentile cut-off defines the countries that are considered corrupt and autocratic. This TCRS suitable universe (top 50 percentile of combined ranks) is evaluated against the MSCI EM Index countries to create a subset of countries that are considered investable. TCRS developed this methodology pursuant to statute that required them to have one, but gave the State Treasurer’s Office the ability to develop the best method for screening.


Returns as of Dec. 2021TCRS – EM PortfolioMSCI – EM IndexMSCI – EAFE*

*Index utilized by the U.S. federal government’s retirement system, the Thrift Savings Plan, International Fund (I Fund) as the baseline for the Fund’s portfolio.


NORTH CAROLINA – An example of concern

The North Carolina Retirement System (NCRS) was valued at $123.8 billion as of December 31, 2021, of which approximately $44.5 billion is invested in public equity. The Public Equity Portfolio of the NCRS is invested in global equities in two subcomponents: a long-only fund (93%) and hedged equity (7%). The Long-Only fund is benchmarked to the MSCI All Country World Investable Market Index (MSCI ACWI IMI). The hedged equity fund is benchmarked to a beta-adjusted version of the ACWI IMI index.

Holdings: Below is a sample of securities contained in the MSCI ACWI IMI that have been added, or are subsidiaries of entities on, the US Department of  Commerce BIS Entity List or the US Treasury Department OFAC Non-SDN CMIC List:


·      AVIC IND FIN A (HK-C)

·      ZTE CORP


Background: These are not good actor companies. Dahua, Inspur, ZTE, IflyTek and others are implicated in the surveillance state operations in Xinjiang Uyghur Autonomous Province. Hoshine, Daqo, and GCL are implicated in the use of forced labor. CSSC Holdings is building China’s aircraft carriers and Aviation Industry Corporation of China (AVIC) and subsidiaries is one of China’s largest defense contractors at $66.96 billion. AVIC manufactures military planes, among other aviation products. (For comparison, Lockheed Martin is valued at $67 billion.) Other listed companies, are, as noted also bad actors. And while we finance these companies via passive investment, the CCP still precludes westerners from owning any companies. We allow them own our companies and acquire them if they can. They do not us allow to do the same.


ILLINOIS – An example of concern

The Illinois State Retirement System (SRS) consists of the State Employee Retirement System (SERS), the General Assembly Retirement System (GARS), and the Judges Retirement System (JRS). These funds are overseen by the Illinois State Board of Investment (ISBI), which collectively controls $24.9 billion in assets under management as of March 31, 2022. Just over $1.8 billion is allocated to “Emerging Markets Equity Composite,” or 7% of the total portfolio, 56% of which is in equity.*

Illinois also has a State Universities Retirement System (SURS), and a Teachers’ Retirement System (TRS), which are not under ISBI oversight but governed by respective Boards of Trustees. As of the last reporting date, the global public equity portfolio of the TRS is benchmarked against the MSCI All Country World Investable Markets Index (MSCI ACWI IMI), and the SURS Emerging Markets Public Equity portfolio (managed by State Street Global Advisors) is benchmarked against the MSCI Emerging Markets Index.

The Public Markets (Passive) funds in the SRS are jointly managed by RhumbLine Institutional Index Management and BlackRock. BlackRock also manages the Public Markets (Active) portfolio.


Holdings*: The international equities component of the passive portfolio overseen by ISBI is in BlackRock Exchange-Traded Funds (ETFs) tracking the MSCI Emerging Markets Index, the MSCI World ex. US Index, and the MSCI World ex-US Small Cap Index. Below is a sample of securities contained in the MSCI Emerging Markets Index that have been added, or are subsidiaries of entities on The US Department of Commerce BIS Entity List or the US Treasury Department’s OFAC NS-CMIC List:



*This represents the ISBI’s target allocations for 2021/2022. Similar to the notations of concern for the companies previously mentioned, all of these companies carry connections to the military-civil fusion operation or malign activities of the CCP.


VIEW: Tennessee Consolidated Retirement System (TCRS) EM Country Screening Methodology


Calling for the Removal of All Chinese Securities from State Public Employee Retirement Systems and State-Sponsored University Endowments


Public employee pension systems, state-funded universities and colleges, and other state retirement funds are presently holding a sizable number of Chinese equities and bonds. All of these investments involve Chinese state-controlled enterprises that fail to comply with basic investor protection standards or federal securities laws (notwithstanding some recent pronouncements of the Public Company Accounting Oversight Board [PCAOB]), posing inordinate financial risks to these institutional investors.

Moreover, fiduciary malfeasance is rampant on the part of pension system administrators, fund managers, asset managers, index providers and others that are willing to hold Chinese companies despite the lack of material risk disclosures, non-transparent financials, and unaudited balance sheets.

Worse still, many of the Chinese companies held by 48 of the 50 states have been sanctioned by the U.S. government for egregious corporate national security and human rights abuses. Taken together, it is abundantly clear that urgent investment policy changes are required at the state level — especially given the inexplicable permissiveness and seeming indifference of federal government regulators and many in Congress to these asymmetric risks to U.S. investors, as well as America’s national security interests and fundamental values.

There are many approaches and solutions to this problem for those who want to protect the integrity, stability, longevity, and value of their retirement and endowment systems. The primary arguments that constitute the basis for this campaign to have all states and local governments remove their investments from China appear below and include: fiduciary malfeasance and investor risk; corporate national security abuses; corporate human rights abuses; and more, concluding with a case study of the State of Tennessee which has gotten this policy right for over a decade.


Fiduciary Malfeasance

  • The CSI 300 Index of Chinese stocks is down over 19% since the start of 2022. The MSCI China Tech 100 Index has fallen nearly 38% year to date. Nasdaq’s Golden Dragon China Index declined some 26% over the past year. MSCI’s China Index is down over 28% and the FTSE China 50 has declined 24%. Other indicators show similar results, undermining any argument that attractive China-related investment returns justify holding Chinese securities, or that being exposed to these sorts of Chinese investments is necessary out of fiduciary duty.
  • Although Chinese equities may temporarily rebound with zero-Covid easing, the expected surge in infections, hospitalizations and deaths will likely more than offset any such gains, not to mention the maturing of a debilitating real estate crisis and other internal demographic and economic factors looming large over the state-managed industry and financial backers.
  • Almost none of the over 5,000 Chinese corporate securities presently in the investment portfolios of scores of millions of unwitting American retail and institutional investors are compliant with U.S. federal securities laws (notwithstanding some recent pronouncements of the PCAOB). The seeming “whitewash” recently announced by the PCAOB in December 2022 has as of yet not change the absence of Chinese material risk disclosures, lack of corporate governance, missing rule of law, or other accepted market standards.
  • Some 95% of all Chinese companies listed in the U.S. are established as Variable Interest Entities (VIEs) primarily in the Cayman Islands, which are little more than shell companies selling shares of their “contracts” with Chinese companies. Consequently, Americans holding VIEs do not own one share of the actual Chinese companies they think they own and have virtually no minority shareholder rights or legal safeguards.
  • Chinese companies refuse to disclose their financials on the specious basis that they are “state secrets”, a ruse no American company could get away with.
  • The USG has permitted American index providers to add over 4,000 Chinese companies drawn directly from domestic Chinese exchanges — known as “A shares” — to be brought into the U.S. capital markets and the portfolios of the vast majority of the 50 states with virtually no regulatory oversight, due diligence, or screening (many of which are actually sanctioned by the United States).
  • The Treasury Department, the SEC, and the National Economic Council have clearly failed to protect American retail and institutional investors — largely because of the “revolving door” of their senior officials and regulators with Wall Street executives, including state pension system administrators — and have demonstrated preferential treatment for Chinese companies over their listed American corporate counterparts as well as shown calloused disregard for the asymmetric financial risks associated with these Chinese companies.


Corporate National Security Abuses

  • Every Chinese company (including what Beijing asserts to be “private sector” enterprises) is required to comply with Article 7 of China’s National Intelligence Law of 2017, which permits the Chinese Communist Party (CCP) to “weaponize” these Chinese enterprises on demand to gather intelligence, advance the strategic objectives of the CCP and/or assist the People’s Liberation Army (PLA).
  • Every Chinese company of the 5,000 with a presence in the U.S. capital markets is required by the CCP to establish Communist Party cells in their senior management structures that have veto power over corporate policies and initiatives, including those relevant to the returns for American retail and institutional investors. (There are also recent reports of American businesses operating within China having to comply with these same practices of CCP cells and other mandated demonstrable acts of support for the Party.)
  • Many of the Chinese companies included in American indices (e.g. MSCI, FTSE- Russell, Dow-S&P, Blomberg-Barclay aggregate bond index etc.) — and the investment products benchmarked against these indices (e.g. Exchange-Traded Funds, Mutual Funds etc.) of asset managers like BlackRock, Vanguard, State Street, and many others — are presently, or were formerly, sanctioned by the U.S. for national security risks and are presently on the Pentagon’s Chinese Military Company List, the Commerce Department’s Bureau of Industry and Security (BIS) Entity List and Military End-User List, and the Treasury Department’s myriad lists maintained by the Office of Foreign Assets Control (OFAC), and etc.
  • A Chinese blockade and/or military invasion of Taiwan as soon as the summer/fall of 2024 would almost surely result in horrific financial losses for many of those state public employee retirement systems and state university endowments that fail to anticipate this obvious fiduciary danger.


Corporate Human Rights Abuses

  • Many of the Chinese companies likely held by state pension systems and university endowments are sanctioned by the U.S. for serious human rights abuses, including equipping concentration camps in China’s Western province of Xinjiang, trafficking in forced labor, aiding and abetting genocide, facilitating China’s surveillance and police state apparatus and other appalling involvements.
  • Out of the more than 5,000 Chinese companies in the investment portfolios of the American people, state pension systems and state University endowments, only 69 are prohibited by OFAC from raising funds in the U.S. capital markets, a paltry number that demonstrates U.S. regulatory indifference. Many of these non-sanctioned Chinese companies are human rights violators and can be proven to have committed these types of offenses. 
  • The U.S. recently passed laws strengthen enforcement of the prohibition on the importation of goods made with forced labor, specifically Uyghur Forced Labor goods but the bans on investment in these same companies that the U.S. is trying to crack-down on are not in place, meaning that state retirement systems and colleges and universities are still investing in the very companies benefiting from the genocide and forced labor scheme the CCP is implementing against the Uyghur people because the financing behind the companies has not been cutoff.


Successful Case Study – the State of Tennessee

  • For the last 10 years, the Tennessee Consolidated Retirement System (TCRS) has not invested in China, Russia, or a host of smaller emerging market countries due to the results of a screening methodology that the TN Treasury Department uses to evaluate nations eligible for investment in the emerging market portfolio.
  • Annually, the TN Treasury evaluates each investable emerging market country using a “Global Democracy Index,” developed by the Economist magazine in combination with an index of corruption called the “Corruption Perceptions Index,” created by Transparency International. Countries which score badly on the combination of corruption and democracy are eliminated as possible investment options. Tennessee has been using this screening method for more than a decade and in that time not once has China scored well enough to merit investment. Tennessee was spared any stress following the sanctions over the Russian invasion of Ukraine as they had no Russia exposure to be concerned about losing value for their investors. Their returns perform consistently well – as demonstrated, below – and indicate there is no loss return for investors, yet perhaps a gain in terms of stability and lower risk by using this emerging markets exposure methodology. The TCRS has a 5% allocation for its EM exposure. The methodology was developed pursuant to statute requiring that a screening process exist, but not prescribing its structure.


Returns as of Dec. 2021TCRS – EM PortfolioMSCI – EM IndexMSCI – EAFE*

*Index utilized by the U.S. federal government’s retirement system, the Thrift Savings Plan, International Fund (I Fund) as the baseline for the Fund’s portfolio.



Almost any one of the facts listed above could justify exclusion of Chinese companies from state public employee retirement systems and state-sponsored University endowments presently holding Chinese stocks and bonds, especially sovereign bonds. This situation is nothing short of scandalous and urgent action must be taken at the state level.

CPA is uniquely equipped — as an original pioneer of this capital markets research and policy initiative — to help spearhead such efforts.  We stand ready to assist in assessments and policy drafting, working with state and local elected officials from legislators and council members to treasurers and comptrollers to governors and fund managers to solve this problem. There are many approaches and solutions to this problem for those who want to protect the integrity, stability, longevity, and value of their retirement and endowment systems.

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