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US commission calls for tighter controls on flows to Chinese markets

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A U.S. government committee, if approved, is moving to seriously impact asset managers and index providers, calling for tighter control over flows to China’s capital markets.

latest Annual report The US-China Economic Security Review Board emphasized security concerns due to the significant increase in US investment. “The surge in US investor participation in the Chinese market outweighs the US government’s defenses against the various threats to US national and economic security posed by US investment in problematic Chinese companies.” The report to Congress said.

“Despite continued tensions between the US and China, US investors, asset managers and investment trusts are increasing their participation in China’s financial markets,” he added.

The US position in China’s equity and debt securities surged 57.5% from $ 765 billion in 2017 to $ 12 trillion in 2020.

This article was previously published Ignite Asia, Titles owned by FTGroup.

“China’s policy makers are opening courts with foreign capital and fund managers to make China’s capital markets function as a means of financing, according to the report. [Chinese Communist party’s] Technology Development Objectives and Other Policy Objectives “.

The Commission has proposed expanding the scope of existing policies to close the “loophole”, and US institutional investors have not done so in the United States-US citizens.

“If we are really interested in protecting US national security, rather than just looking, we should close this loophole, as the Commission recommends,” it argued.

Updated sanctions policy earlier this year issued The U.S. Treasury Department’s Foreign Asset Management Authority states that an entity may provide investment management or advisory services to non-US individuals, foreign funds, or entities in connection with the purchase or sale of securities that violate the investment ban. Not forbidden. ” ..

The June announcement seemed to ease some of US management’s concerns that land operations in China and Hong Kong could be seriously impacted by US government policies.

The new Commission report also aims at how the Chinese government has opened its capital markets to foreign investors.

“The Chinese government allows foreign companies and investors to participate in the Chinese market only if it is in the national interest,” he said.

“As a result, the” opening “of nominal finance in China is carefully managed, designed to strengthen state control over capital markets and direct foreign funds to achieve the Chinese government’s national development goals. It’s a process that has been done, “said the Commission.

One particular issue identified by the Commission’s analysis is the allocation of asset managers to Chinese assets through passively managed funds.

Recently, FTSE Russell I started Gradually introduce China’s debt into its flagship World Government Bond Index. In the phased inclusion process, which began on October 29, Chinese government bonds will account for a total of 5.25 percent of the index in three years.

The report states that the significant increase in the inclusion of Chinese securities in the investment index has automated the allocation of US investors to Chinese companies.

“As passively managed index funds duplicate these indexes and actively managed funds are at least trying to outperform them, index providers are crucial but regulated in guiding foreign portfolio investments in Chinese companies. I’ve played a role I haven’t played, “he added.

The Commission said, “The securities of the Chinese headquarters listed on the US exchange will be listed as an index provider that includes securities issued on the mainland China exchange or the Hong Kong Stock Exchange. [variable interest entity]Derivative products of, or any of the above types of securities, are subject to SEC regulation. “

The Commission also advises Congress to mandate an annual renewal of accurate US portfolio investment positions in China since 2008, including funding from the US Treasury via offshore centers such as the Cayman Islands.

US President Joe Biden signed an executive order in early June Ban Americans have invested in 59 Chinese companies, ranging from the surveillance and defense sector to alleged links to Chinese troops, expanding previous orders by former President Donald Trump. However, the order also appeared to limit the scope of policy, alleviating some concerns that US fund groups in Asia could have been severely hampered by the restrictions.

BlackRock, Vanguard and State Street Global Advisors all have large investments in China, but many other US managers, including JP Morgan Asset Management and Morgan Stanley, are also quickly building onshore businesses in the market. increase.

Additional report by Echo Huang

* Ignites Asia is a news service issued by FT Specialists for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends.Trials and subscriptions are available at ignitesasia.com..

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