US federal pension fund to exclude Hong Kong and China investments

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The main US federal government pension fund is to exclude Chinese and Hong Kong-listed stocks on the recommendation of its adviser, which cited the rising tensions between the world’s two largest economies.

The $771bn Federal Retirement Thrift Investment Board said on Wednesday that it would change the benchmark index followed by its international fund. The move will mean a shift away from an index that includes Hong Kong-listed equities.

Washington has increasingly limited the range of Chinese companies available to US investors on the basis of national security, with a series of rule changes first under former president Donald Trump and then his predecessor Joe Biden. 

In 2020, Trump demanded that the FRTIB not make a switch ti was considering to an index with some China exposure. His advisers warned that such a shift would expose the fund to risks from investments in companies that posed national security and humanitarian concerns by operating in violation of US sanctions.

The FRTIB, which manages retirement saving accounts for almost 7mn people, said the decision on Wednesday to change the benchmark followed by its $68bn I Fund was made on the recommendation of its investment consultant, Aon, and staff.

The FRTIB quoted Aon as saying: “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.”

The fund will switch 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.

The adjustment will more than double the number of countries included in the fund, which will be invested in more than 5,600 stocks, compared with almost 800 now, the FRTIB said.

Demand has grown among global investors for funds that exclude China in the face of mounting geopolitical risk and a lagging recovery in the world’s second-largest economy.

Fund managers have even received requests for “Asian allies” funds that invest in US-friendly markets and provide insulation from tensions with China.

“This is part of an ongoing transition regarding China exposure for US government money,” said Jason Liu, head of east Asia strategy for BNP Paribas.

Liu added that while political pressure had been growing on government funds invested in China for the past 5 years, the recent underperformance of Chinese equities had made it easier to justify 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 said.