U.S. Warns Colleges to Divest China Stocks on Delisting Risk

Endowment boards told taking action ‘would be prudent’. Move could hit billions of dollars invested in Chinese stocks.

U.S. Warns Colleges to Divest China Stocks on Delisting Risk
A pedestrian wearing a protective mask exits Harvard Yard on the closed Harvard University campus in Cambridge, Massachusetts, U.S. (Photographer: Adam Glanzman/Bloomberg)

The U.S. State Department is asking colleges and universities to divest from Chinese holdings in their endowments, warning schools in a letter Tuesday to get ahead of potentially more onerous measures on holding the shares.

“Boards of U.S. university endowments would be prudent to divest from People’s Republic of China firms’ stocks in the likely outcome that enhanced listing standards lead to a wholesale de-listing of PRC firms from U.S. exchanges by the end of next year,” Keith Krach, undersecretary for economic growth, energy and the environment, wrote in the letter addressed to the board of directors of American universities and colleges, and viewed by Bloomberg.

“Holding these stocks also runs the high risks associated with PRC companies having to restate financials,” he said.

The warning to endowments opens a new front in the Trump administration’s multipronged campaign against China’s government, businesses and individuals. The college and university funds represent billions of investment in Chinese companies, according to a 2019 investigation by Bloomberg, driven by the prospect of better returns.

China’s Foreign Ministry on Wednesday called the U.S. an “important” partner in investment, saying both sides had gained from their financial cooperation.

“Putting up obstacles for such cooperation does not serve the interests of our capital markets,” ministry spokesman Zhao Lijian told a regular news briefing in Beijing in response to a question about the U.S. warning. “We urge the U.S. side to create a fair, just and non-discriminatory environment for Chinese companies’ investment in the U.S.”

Escalating Tensions

Tensions between the two powers are rising over trade, the Covid-19 pandemic and a U.S. presidential election that has fueled an escalation of anti-China rhetoric. President Donald Trump’s administration has tightened limits on Chinese university students, ordering new restrictions in June that canceled the U.S. visas of certain graduate students and university researchers.

The Trump administration earlier this month also went after two of China’s largest tech companies, putting out twin executive orders prohibiting U.S. persons and companies from doing business with ByteDance Ltd.’s TikTok video app and Tencent Holdings Ltd.’s WeChat messaging service.

Endowments will be eager to examine the issues the government is raising, Krach said Tuesday in a Bloomberg Radio interview.

“These boards have a moral responsibility, and perhaps a fiduciary duty, to really look into this, to make sure their investments are clean,” said Krach, former chairman of the Purdue University Board of Trustees.

Endowment managers “are always monitoring the political winds,” said Jim Dunn, chief investment officer of Verger Capital Management, whose clients include Wake Forest University’s fund. “They are blowing pretty hard, but with no real impact yet.”

China Campaign

Tuesday’s warning is part of a larger campaign by U.S. officials to slow the money that has flowed from investment funds into Chinese companies. Secretary of State Michael Pompeo told state governors in February that some pension funds are playing into China’s hands.

The flow of U.S. pension and endowment cash into Chinese equities has boosted the success of global giants such as online retailer Alibaba Group Holding Ltd., as well as rising stars like artificial-intelligence company SenseTime Group Ltd., which is now on a list of tech companies banned from doing business in the U.S.

In addition to venture capital, endowments have directed growing portions of their passive investments into Chinese companies that U.S. politicians say are linked to human rights abuses and national security threats. Global index provider MSCI Inc. has added Chinese stocks to its benchmark emerging markets index.

U.S. regulators recently urged American stock exchanges to set new rules that could trigger the delisting of Chinese companies, following mounting concerns that investors are being exposed to frauds.

Foreign equities made up 13.9% of college endowments with more than $1 billion, according to the most recent data compiled by the National Association of College and University Business Officers for the year ended June 2019.

The State Department letter also warns universities of China’s growing influence on campuses and said the U.S. is accelerating investigations of what it called “illicit PRC funding of research, intellectual property theft and the recruitment of talent.”

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