restricting portfolio investment in China

According to press reports, the Trump administration has ordered a government pension fund not to hold a non-US equity index fund, about 4% of whose value is Chinese stocks, on the grounds that the Chinese shares represent a national security threat.  Because the board of the fund has ignored this order in the past, Trump is asking Congress to remove a majority of its members and replace them with his loyalists.

If there is a conceptual argument for this action it is that buying shares in Chinese publicly-traded companies, albeit indirectly, potentially lowers the firms’ cost of capital, making it easier for them to expand–and that ultimately this expansion might be somehow bad for the US.  This is a real stretch.  As a practical matter, whether this fund owns the index the board figures is best for pensioners or one like it that excludes Chinese shares won’t make much difference, either to China or to the fund.  Why inject politics into the decision, then?

I see three possibilities:

Assuming Congress allows the change of board members, Trump can force the change he wants and has a talking point about taking action against China at a time when others are ignoring him.  Or, the idea may be to establish the principle that Trump can control the fund’s investment decisions.  Maybe then the fund would like to take over a hotel lease in Washington, or a golf club in Scotland, or pump money into an underground coal mine in West Virginia.  Or it could be this is a tiny first step in a plan toward barring all American investors from buying Chinese shares.  If this last, it would likely only result in Americans’ moving investment accounts to, say, Canada, losing Washington tax revenue.

 

 

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