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2017-2021 ARCHIVED CONTENT

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Thanks for joining me today. I’d like to update you on the latest developments related to the Executive Order on financing Communist Chinese military companies, and a couple of other newsworthy items.

Clean Network

As the Wall Street Journal recently mentioned, the Clean Network is an undisputed success and the most enduring foreign-policy legacy of the last 4 years. The Clean Network now includes 60 countries representing nearly 2/3rds of the world’s GDP (that’s including China). We’re also up to 200 telcos and dozens of the world’s industry leading companies, including Oracle, Cisco, HP, NEC, Fujitsu, Reliance Jio, and others.

And tomorrow, I’ll be welcoming Eswatini—the first African member of the Clean Network.

In just a few months, the Clean Network has become a truly global movement to secure 5G from Huawei and the Chinese Communist Party’s surveillance state. The tide has turned and is gaining momentum at a rapid clip.

We’ve expanded the Clean Network to include Clean Cloud, Clean Apps, Clean Store, Clean Cable, Clean Things, Clean Currency, Clean Drones. It means much more than just Clean Technology. We have a great start on Clean Infrastructure with Clean Financing with the Blue Dot Network, Clean Energy with Clean Minerals with Energy Resource Governance Initiative (ERGI). It also includes Clean Supply Chains with Clean Labor Practices.

Taiwan

There is also our progress with Taiwan. In September, I was honored to become the highest-ranking State Department official to visit Taiwan since 1979. Since then, we have made years’ worth of diplomatic advances in just a few months.

On November 20, following on a commitment made during my trip, we hosted the inaugural U.S.-Taiwan Economic Prosperity Partnership Dialogue here in Washington. It resulted in the signing of a five-year memorandum of understanding regarding economic security and cooperation.

And on December 14, we signed a Science and Technology Agreement expressing the U.S. and Taiwan’s shared commitment to values like trust, transparency, innovation, the rule of law, intellectual property protection, research integrity, and respect for human rights.

These are moral and strategic victories in addition to diplomatic victories. Taiwan is a great partner, a great friend and a magnificent role model of democracy for the region. It’s a beachhead for democracy in the Indo-Pacific—and a living symbol that the CCP’s authoritarianism can be resisted and overcome.

I am humbled by The Taiwanese people now dubbing me “Taiwan’s number one friend.”

Malign Chinese Companies in U.S. Capital Markets

And that leads me to our marquee topic today: the Chinese Communist Party’s incursion into U.S. financial markets.

As you know, on July 1, 2020, I sent a letter to all U.S. financial institutions stating that they have a duty to establish governance principles when it comes to investing in entities that directly or indirectly facilitate human rights abuses. The boards of these institutions have a moral duty, and perhaps even a fiduciary duty to divest from companies that contribute to human rights violations. Pension funds, university endowments, indexes, mutual funds, insurance companies, venture capital firms, institutional investors, and particularly emerging index funds, at a minimum, should disclose to their constituents the Chinese companies they invest in.Chinese companies’ financial practices are opaque for a reason. Chinese companies on U.S. stock exchanges do not comply with Sarbanes-Oxley transparency provisions, which puts all investors at risk.

I am confident that our business community will reject any involvement or association with the oppression in Xinjiang—first, because it is the right thing to do, and second, because of the significant legal and business risks involved.

On August 18, I also sent a letter to the governing boards of American universities, alerting them to the threats the Chinese Communist Party poses to academic freedom, to human rights, and to university endowments. I said, ”the boards of your institution’s endowment funds have a moral obligation, and perhaps even a fiduciary duty, to ensure that your institution has clean investments and clean endowment funds. I urge you to divest from companies that are on the Entity List or that contribute to human rights violations. I also ask that you strongly consider publicly disclosing to your campus communities immediately all People’s Republic of China (PRC) companies that your endowment funds are invested in, especially the PRC companies in emerging markets index funds. Studies have shown that the majority of the U.S. university endowment fund portfolios own PRC stocks listed on American exchanges either directly or indirectly through emerging markets index funds. I would also like to call your attention to the recommendations issued by the President’s Working Group on Financial Markets, which examine the risks to U.S. investors posed by Chinese companies listed on U.S. securities exchanges.”

Most Americans have no idea that their own money—held in pension funds, 401Ks, and brokerage accounts—is financing Chinese companies that support the People’s Republic of China’s (PRC’s) military, security, and intelligence apparatus, as well as human rights abuses on an epic scale, such as those in Xinjiang. You all know about Executive Order 13959Addressing the Threat from Securities Investments that Finance Communist Military Companies—released on November 12, 2020. It prohibits purchases by U.S. persons in publicly traded securities, or any securities that are derivative thereof, of companies listed by the Department of Defense or Treasury, regardless of the percentage ownership. Treasury’s guidance states that divestment must be completed by November 11, 2021.

Ample warning has been given to public and private equity compliance officers and risk managers to understand and disclose to their constituents the material risk  associated with investments identified in the  Executive Order.  CEOs and their boards now have a  legal duty to  implement and be in full  compliance with  the  Executive Order.  They also may have a fiduciary  duty  to take decisive action to minimize any negative effect on their  clients’ holdings due to the imminent divestment of CCMCs.  Best practices in material risk mitigation, disclosure, and transparency are essential to proper corporate governance.

The  Defense Department had publicly listed 44 parent-level corporations as CCMCs, including China Mobile, China Telecom, and China Unicom. Today, the Defense Department publicly listed an additional nine parent-level corporations as CCMCs, plus nearly 140 subsidiaries from the first 35 as CCMCs in their own right. CCMCs  conduct business through a network of subsidiaries sometimes running into the dozens  designed to  conceal money flows to the PRC military, intelligence, and security services.

U.S. investors—including banks, pension funds, foundations, insurance companies, and university endowments—have for years unknowingly funded these 44 CCMCs as a result of their opaque network of at least 1,109 subsidiaries, many dozens of which are tracked by MSCI, FTSE, and other indexes in thousands of financial firms’ products.

The  Treasury Department has noted  that the Executive Order applies to  the  ownership of any CCMC shares, as well as any of their 50 percent or greater majority-owned subsidiaries, or any other controlled entity,  that are publicly listed by the Treasury or Defense Departments.

The Executive Order prohibits Exchange Traded Funds, mutual funds, and index funds like those managed by BlackRock, Vanguard, and others from investing in CCMCs.

This State Department Fact Sheet shows hundreds of CCMC and subsidiary stocks, which may be eligible for listing under E.O. 13959 and that continue to be listed on some major index funds.

Why is this important?

PRC stocks directly affect the pension assets of American workers and retirees There are more than 5,000 public pension systems in the United States, according to the United States Census Bureau. $10.7 trillion invested in the private pension plans is covered by the Employee Retirement Income Security Act (ERISA).

The Thrift Savings Plan’s governing board study revealed that a majority of pension funds use the MSCI emerging market index as their investment guide, including:

  • The 401k’s of all 10 largest publicly traded U.S. companies;
  • All 10 of the top federal contractors;
  • All 20 of the largest state pension plans;
  • All six of the largest target-date mutual-fund providers with holdings of $1.9 trillion as of June 2019;
  • The Pension Benefit Guaranty Corporation (PBGC), with $131 billion in pension insurance reserves;
  • Numerous Insurance Funds;
  • Numerous University and College Endowment Funds.

While we welcomed the recent decisions by MSCI, FTSE Russell, and S&P Dow Jones to remove certain entity listed PRC companies from their Indices, the truth is that these removals represented—at best—a good start.

They have taken action on only a sampling of the worst offenders on the Defense Department’s list of parent-level “Communist Chinese military companies,” but those companies are the tip of an iceberg of more than 1,000 subsidiary companies—dozens of which are still tracked by MSCI, FTSE, and other indices.

As long as these subsidiaries retain access to America’s capital markets, the PRC’s military will continue to be financed on the backs of American workers. 

All American indices, financial institutions, and investors have a legal duty to comply with the new Executive Order by divesting any Chinese companies implicated in these malign activities. It is an essential matter of national security to ensure that the American people are not used as fundraising tools of an authoritarian state hostile to U.S. interests. American investors are being forced to support companies that produce technologies for the surveillance of Chinese civilians, and the repression of Uyghurs and other Muslim minority groups in Xinjiang. This ends now.

There is important work to be done on continuity of policy in aligning the Defense Department list of CCMCs with the Commerce Department Entity List, and the Military End User list.

The U.S. Government maintains several lists of foreign companies of concern. Companies on these lists pose a risk to U.S. national security and/or foreign policy interests. Inclusion on the Commerce Department’s Entity List means that a foreign company cannot receive U.S. exports of certain dual-use items without a license. Inclusion on the Defense Department’s list of Communist Chinese military companies means that U.S. persons cannot invest in their securities or any securities that are derivative thereof. These lists have different legislative and regulatory origins designed for different purposes.

In technology-speak, that means they are non-interoperable. They don’t talk to each other. I believe that the next Administration—to protect U.S. national security, ensure continuity of policy, and to fully address the unprecedented scale of the challenge that we are facing—must find a way of harmonizing all these diverse lists and marrying them up together. If a company is of such great national security concern that it is barred from receiving U.S. investment, then it probably shouldn’t be able to receive sensitive technology either. And vice versa.

In my experience, the effectiveness of U.S. policy is undercut when we add a company like Huawei to the Entity List, but then still issue licenses to them. Sure, there is an effect on U.S. companies profits, and sure we should do this in better coordination with our allies in Korea, Japan, and Europe.But what’s more important? Profit, or our national security from the Chinese Communist Party?

The Communist Party could not be any clearer about its strategy for military-civil fusion, bringing its leading technology companies in to support its military, intelligence, and security apparatus. Military-civil fusion is not a secret. It’s one of President Xi Jinping’s signature initiatives. What’s shocking is that Communist Party and government leaders in Beijing talk about military-civil fusion openly and publicly all the time.

The United States has to do more to address this. Today, only 7 of the 35 companies on the Defense Department’s list of Communist Chinese military companies are on the Commerce Department’s Entity List.

For the sake of U.S. national security, we have to bring together these lists—which share the same underlying rationale—U.S national security.  I hope the new Administration makes the harmonization of these lists a top priority. Without it, we’re fighting with one hand tied behind our back.

I want to leave plenty of time for your questions, but let me close by noting the important role all of you play in this.You wield the torch of transparency for the American citizen. And we need you to shine it on the CCP’s efforts to co-opt American wealth. All Americans have a right to know that their money is going into the pockets of autocrats who use it to tighten their iron-fisted grip on their own people—and increasingly, on the world.

Please tell American citizens who are investors and pension holders that their fund manager should notify you if your investments are contributing to the Chinese Party’s military buildup, the surveillance state, and human rights abuses. If you have not been notified by January 30th, call them. Ask them if you are exposed. If you are exposed, ask them the name of the companies, the amount and when you will be divested. Then ask them why they do not directly and clearly disclose to you. If they do not get a satisfactory answer, best to find a new fund manager.

When empowered with this knowledge, I am confident that they will join in demanding that all implicated Chinese companies be scrubbed from U.S. financial markets. Until that happens, the CCP will continue to bleed every penny it can out of American pockets to fund its malign purposes.

Now I’ll be happy to take your questions.

U.S. Department of State

The Lessons of 1989: Freedom and Our Future