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ICYMI | Financial Times: US Funds Pull Out of Chinese Groups Involved in Xinjiang Detention

Mar 28, 2019 | Comunicados de Prensa

“The US government should require Chinese companies operating in America’s capital markets to disclose their ties to the Chinese government’s security apparatus and human rights abuses. American investors and pensioners have a right to know this information given it poses material, asymmetric risks to the reputations and valuations of Chinese companies.” — U.S. Senator Marco Rubio (R-FL)
 
US funds pull out of Chinese groups involved in Xinjiang detention
Washington ratchets up scrutiny of how capital markets are used to fund crackdown on 1m Uighurs
By James Kynge in Hong Kong and Demetri Sevastopulo in Washington
March 28, 2019
Financial Times
 
Large US investment funds have sold their equity stakes in Chinese surveillance company Hikvision, as scrutiny mounts in Washington over how western capital markets are being used to fund the mass detention of millions of Muslim Uighurs in China.
 
Hikvision is the world’s biggest surveillance company and supplies technology to detention camps in the Chinese region of Xinjiang. Human rights groups estimate that 1m Uighurs are being held in the facilities which Beijing calls “education centres”.
 
Fidelity Emerging Markets Fund, Goldman Sachs EM Equity Fund, Fullerton Global Emerging Markets Equities Fund, RWC Global Emerging Equity Fund and three other US funds have all closed their positions in recent months, according to Copley Fund Research, a consultancy. All of the funds declined to comment.
 
But in spite of the heightened scrutiny in Washington, the California State Teachers’ Retirement System (Calstrs) and the New York State Teachers’ Retirement System (NYSTRS), two public pension funds for teachers, still own shares in Hikvision, according to publicly available information.
 
The divestments come as Washington takes a tougher stance on Hikvision and other Chinese companies that receive support from funds operating in US capital markets, according to several people familiar with the thinking of the Trump administration and the US Congress.
 
Marco Rubio, a senior Republican member of the Senate foreign relations committee and an influential China hawk, is leading an effort to get members of Congress to sign a letter expressing concern about “problematic” Chinese companies identified as connected to abuse in Xinjiang and other groups with ties to Chinese intelligence and the Chinese military.
 
“The US government should require Chinese companies operating in America’s capital markets to disclose their ties to the Chinese government’s security apparatus and human rights abuses,” Mr Rubio told the Financial Times. “American investors and pensioners have a right to know this information given it poses material, asymmetric risks to the reputations and valuations of Chinese companies.”
 
A Hikvision spokesperson declined to comment. Spokespeople for another company attracting US scrutiny, Zhejiang Dahua Technology, did not reply to emails seeking comment. Dahua is China’s second largest surveillance equipment company and like Hikvision is listed on the Shenzhen stock market.
 
Hikvision and Dahua are among a cohort of A-shares added by MSCI, the world’s leading equity index provider, into its benchmark emerging markets index last year. This means that passive funds around the world that invest in MSCI EM index companies automatically hold positions in both companies.
 
But many active funds, attracted by a boom in surveillance technologies deployed across China, have also snapped up the companies’ shares.
 
Hikvision has outpaced all other Chinese A-share companies in terms of cumulative investment inflows from overseas emerging market funds with a total $732m invested by the end of February, according to Copley Fund Research, which monitors the investments of 180 large funds.
 
“State public pension funds, the MSCI EM index and other funds under management that hold companies like Hikvision have seemingly engaged in little, if any, human rights or national security-related due diligence,” said Roger Robinson, president and chief executive of RWR Advisory Group, a Washington-based consultancy.
 
This “is despite the fact that the risks to share value and corporate reputation can be material and asymmetric”, added Mr Robinson, a former White House National Security Council official and ex-chairman of the Congressional US-China Economic and Security Review Commission, an influential panel on China issues.
 
A spokesperson for Calstrs confirmed the fund owns Hikvision shares but said it “had not had concerns brought to (its) attention”. A fund document put the holding at $24.4m as of June 30 2018.
 
A spokesman for the NYSTRS declined to comment on the fund’s “individual holdings” but a fund document showed it owned 26,402 shares in Hikvision as of December 31 2018.
 
In August 2018, Mr Rubio was a signatory to a bipartisan letter to the Trump administration calling for sanctions against Chinese government officials and entities complicit in the “human rights crisis in China’s Xinjiang”. That letter, however, did not address capital markets concerns.
 
Investment in Hikvision from international funds has soared in spite of such warnings and a US decision last year to add the China Electronics Technology Group (CETC), Hikvision’s parent group, to a list of 44 Chinese entities that are subject to US export controls because they pose a “significant risk” to US national security.
 
IPVM, a research website on surveillance, revealed in a report last year that Hikvision and Dahua have won $1.2bn in surveillance project contracts in Xinjiang since 2016. Two of the projects won by Hikvision mandated advanced camera systems for detention camps and hundreds of mosques.
 
One fund manager who sold out of Hikvision said investors were turning a blind eye to Xinjiang’s detention camps because the booming surveillance industry in China promised strong returns. “A lot of investors talk about ethical investing but when it comes to Hikvision and Xinjiang they are happy to fill their boots,” said the fund manager. “It is pretty hypocritical.”