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The rivalry between the United States and China has spread to a fight over financial ties between the countries, pitting Washington security hawks against Wall Street investors.

Members of Congress and the Trump administration are warning that Chinese companies are raising money from American investors and stock exchanges for purposes that run counter to U.S. interests. To help curb the flow of dollars into China, they have turned their sights on an unlikely target: their own retirement fund.

The Thrift Savings Plan is the retirement savings vehicle for federal government employees, including lawmakers, White House officials and members of the military. Beginning next year, the fund is scheduled to switch to a different mix of investments that would increase its exposure to China and other emerging markets. Lawmakers and some in the Trump administration are trying to stop that move, saying the change would pump federal workers’ savings into companies that could undermine national security or have been sanctioned by the United States.

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Last Tuesday, a bipartisan group of senators sent a letter to the plan’s governing board urging it to reverse its decision.

“For China, this is the greatest free lunch program for capital they’ve ever known because they’re able to penetrate the investment portfolios of scores of millions of Americans in basically one shot,” said Roger Robinson, president of consulting firm RWR Advisory Group, which has distributed research on the subject to lawmakers and members of the Trump administration.

The push to forestall more investment in China is part of a broader effort by some officials in Washington to separate ties between the world’s two largest economies. It is also another indication that President Donald Trump’s conflict with China will persist, even if the United States signs a limited trade deal with Beijing later this year.

Some China critics are pressing Trump to go beyond the tariffs he has already imposed and erect larger barriers between the two countries, including restrictions on the flow of technology and investment.

In recent months, officials have been making more frequent calls to re-examine China’s presence in the stock portfolios of American investors. Administration officials, including members of the National Security Council, have begun pressing the Securities and Exchange Commission to increase scrutiny of Chinese firms, which have long skirted the auditing and disclosure requirements of American stock exchanges, putting investors at risk. Chinese law restricts the company documentation that auditors can transfer out of the country, limiting their visibility to U.S. regulators.

Policymakers are considering more stringent proposals. In June, a bipartisan group of senators introduced legislation that would delist foreign firms that do not comply with U.S. financial regulators for a period of three years.

Another area of concern is the decision by companies that compile major stock indexes to include more firms that are listed on Chinese exchanges. While investors can’t put money directly into an index, they can invest in a fund that mirrors an index’s particular basket of securities.

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As global stock markets have steadily trended upward in recent years, more investors have turned to passive investing, in which a fund simply mirrors a major index, rather than active investing, in which fund managers try to pick certain stocks to outperform the market.

And as China’s economy has continued to grow, index providers have increased the weighting of Chinese stocks. The move has been a win for Beijing, funneling money into the Chinese market and helping to enhance the international profile of its companies and its currency, the renminbi.

Like many retirement vehicles, the Thrift Savings Plan, which manages $600 billion of savings by millions of federal government employees, offers participants the option of investing in an index fund.

The plan, which is similar to a 401(k) and the largest of its kind in the world, gives federal workers the option to invest in a fund with international exposure. If they do, their savings go to a fund featuring the same securities as a popular index developed by Morgan Stanley.

Currently, the fund mirrors an index with stocks solely from developed countries, called the MSCI Europe, Australasia, Far East Index. But on the advice of an outside consultant, Aon Hewitt, the board decided to shift those investments to better diversify its portfolio and obtain a higher return. In mid-2020, the fund is to begin mirroring Morgan Stanley’s MSCI All Country World ex-USA Index, which includes shares of more than 2,000 companies from dozens of developed and emerging countries, including China.

At a board meeting in Washington on Monday, Aon Hewitt defended the recommendation to switch to the new index, saying that carving China out of the investment plan would diverge from industry practice and likely result in lower returns for federal employees.

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Michael Kennedy, chairman of the board that manages the plan, pressed the consultants on the switch, asking if the fund would be disadvantaged by sticking with the current index.

“You definitely would be an outlier by not providing access to emerging markets,” Russell Ivinjack, one of the consultants, said.

Trump’s advisers have joined Democrats and Republicans in Congress in expressing concerns about the planned change. They say it will funnel the savings of Americans into some companies that have murky financial records or pursue activities that run counter to America’s national interest.

Sens. Marco Rubio, R-Fla., and Jeanne Shaheen, D-N.H., sent a letter last week to the body that manages the plan, the Federal Retirement Thrift Investment Board, urging it to reverse a decision that they said would invest retirement funds in companies “that assist in the Chinese government’s military activities, espionage, and human rights abuses, as well as many other Chinese companies that lack basic financial transparency.”

The letter, which was also signed by Sen. Kirsten Gillibrand, D-N.Y., as well as Republican Sens. Mitt Romney of Utah, Josh Hawley of Missouri and Rick Scott of Florida, said, “It is our responsibility to these public servants to ensure that the investment of their retirement savings does not undermine the American interests for which they serve.”

A spokeswoman for Federal Retirement Thrift Investment Board said it was reviewing the letter.

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One company in the new index that the senators have pointed to is Hikvision, a Chinese manufacturer of video surveillance products that the United States placed on a blacklist earlier this month. The Trump administration says the company has provided surveillance equipment that aided China in a campaign targeting a Muslim minority, including in constructing large internment camps in the autonomous region of Xinjiang.

The MSCI All Country World ex-USA Index also includes AviChina Industry & Technology Company Ltd., a subsidiary of China’s state-owned manufacturer of aircraft and airborne weapons, which manufactured planes and missiles that were the centerpiece of a military parade in Beijing earlier this month. Also included in the index is China Mobile, which is blocked from providing international services in the United States; ZTE, which the United States fined last year for violating sanctions on Iran and North Korea; and China Communications Construction Co., which is reportedly involved in island building in the South China Sea.

The index also includes Russian companies that have been sanctioned over Russia’s intervention in Ukraine, cyberespionage and other issues. A December 2018 report by RWR Advisory Group found that five of the 11 Russian constituents of the index had been sanctioned by the Treasury Department, including Russian gas companies Gazprom and Novatek.

Richard V. Spencer, secretary of the Navy, said in a Wall Street Journal op-ed article last week that the savings of members of the military should not be “unwittingly helping to underwrite the threats China and Russia pose to their lives.” Spencer said the board must reverse its decision “for the good of the country and those who serve it.”

Business leaders and Wall Street executives have started pushing back, saying efforts to restrict investment constitute government interference and could destabilize financial markets. When policymakers begin to pull the threads of financial connections between the United States and China, it’s not clear how much they will unwind, they say.

“There are certainly reasons why the U.S. should be concerned about various things China is doing and the rivalry it presents,” said Patrick Chovanec, chief strategist at investment advisory firm Silvercrest Asset Management. “But by the same token, they’re the second-biggest economy in the world. If you push them off a cliff, you better make sure you’re not handcuffed to them.”

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Reversing the decision could cost federal employees who are saving for retirement. China has some of the world’s largest stock markets, and it is now home to more companies in the global Fortune 500 than the United States. And while China’s growth has slowed sharply in recent years, its economy is still expanding at about 6% annually, roughly three times as fast as the United States’.

Fast-growing economies tend to be favorable for stock investing, suggesting that investors could be giving up some gains if they’re blocked from the Chinese markets. In an analysis for the Thrift Retirement Board, Aon Hewitt found that $1 invested in the securities on the new index would have returned $3.28 after 23 years, while $1 invested in the securities of the original index would have returned $3.05.

“At the end of the day, stock investing is about being exposed to growth,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “That is where the growth is.”

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