Serrari Group

In response to escalating tensions between the United States and China, the Federal Retirement Thrift Investment Board (FRTIB), overseeing the main US federal government pension fund, has decided to exclude Chinese and Hong Kong-listed stocks. The $771 billion pension fund announced on Wednesday that it would alter the benchmark index for its international fund, marking a significant shift away from Hong Kong-listed equities.

The move comes as Washington continues to restrict the accessibility of Chinese companies to US investors, citing national security concerns. This trend began under former President Donald Trump and has persisted during the administration of his successor, Joe Biden. In 2020, Trump explicitly urged the FRTIB to refrain from switching to an index with Chinese exposure, emphasizing the potential risks associated with investments in companies operating in violation of US sanctions and posing national security and humanitarian concerns.

The FRTIB, responsible for managing retirement savings accounts for nearly 7 million people, based its decision on the recommendation of its investment consultant, Aon, and internal staff. Aon expressed concerns about the uncertainty surrounding current investment restrictions on China and Hong Kong. The investment consultant stated, “If the current investment restrictions on China are the beginning of further restrictions spanning China and Hong Kong investments, this level of uncertainty can outweigh the benefits of expanding the I Fund to include China and retaining exposure to Hong Kong.”

As part of this adjustment, the fund will transition from the MSCI Europe, Australasia, and Far East index to the MSCI All Country World ex-USA ex-China ex-Hong Kong Investable Market index. This modification will more than double the number of countries included in the fund, with investments spread across over 5,600 stocks, compared to the current portfolio of almost 800 stocks.

The decision reflects a growing global trend among investors seeking funds that exclude Chinese assets due to mounting geopolitical risks and a sluggish recovery in the world’s second-largest economy. Some fund managers have even reported receiving requests for “Asian allies” funds, which focus on US-friendly markets to provide insulation from tensions with China.

Jason Liu, Head of East Asia Strategy for BNP Paribas, commented on the ongoing transition in US government funds regarding China exposure. He noted that political pressure has been mounting on government funds invested in China over the past five years, and the recent underperformance of Chinese equities has further justified divestment. “They go hand in hand, the geopolitics and performance — if you have both going against [Chinese stocks], it’s easier to do that transition,” Liu explained.


November 16, 2023
By: Delino Gayweh

Serrari Financial Analyst

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