Blackrock Closes China Fund After Lawmakers' Probe

On July 31, BlackRock Chief Executive Larry Fink and MSCI Chief Executive Henry Fernandez were told by theHouse Select Committee on Strategic Competition between theand the Chinese Communist Party that their firms were being probed with regard to investments in certain Chinese companies.

The House select committee said it asked BlackRock and MSCI for information about their facilitation ofinvestments into about 50 Chinese companies, which were blacklisted over claims of support of the Chinese army or involvement in alleged human rights abuses.

BlackRock said in a statement that it complies with all applicablelaws in its handling of all investments in China.

Commentators see a definite connection between the investigation and the closure of BlackRock's China Flexible Equity Fund.

“The rising costs facing by BlackRock in China do not only mean operational costs but also the risks of growing political pressure from thelegislators,” Chau Sze-tat, a political commentator, says on his YouTube channel.

“In the past, whenfunds were making big money in China, they would not care about any investigation from the US,” he says.“Now, BlackRock found that its clients have lost interest in Chinese stocks. Why not close its China equity fund to avoid trouble?”

The investigation was launched beforePresident Joe Biden on August 9 signed an executive order that will restrictfunds and firms to invest in China's semiconductor, quantum computing and artificial intelligence sectors.

The investment curbs are said to be softer than expected as they exclude the biotechnology and clean energy sectors. They will only target companies that have at least 50% consolidated revenue,income, capital expenditure, or operating expenses related to the covered industries. It means thatfunds can still trade shares of Alibaba and Tencent although their units have invested in AI.

The Financial Times reported on August 31 thatsales of A shares by offshore traders amounted to 90 billion yuan (US$12.4 billion) in August. Analysts said global investors were disappointed as Beijing had not yet unveiled a more targeted bailout for heavily indebted property developers.

On Thursday, the Shanghai Composite Index fell 1.13% to close at 3,122. But it has grown 0.19% so far this year. The Shenzhen Component Index dropped 1.84% to 10,321. It has lost 7.16% this year.

Some Chinese commentators say they would not blame BlackRock for the closure of its China Flexible Equity Fund as many local individual investors have also lost money these few years.

“It's not easy for individual investors to make money in the A-share markets as many listed firms fell below their initial public offering prices,” a Chinese vlogger says in a video posted on Thursday.“It seems that China's stock markets were designed only for companies to raise money but not for investors to gain money.”

He says the number of A-share companies has grown from 1,000 to 6,000 in the past decade but not many of them are of high quality. He says listing rules should be strengthened to improve investor confidence.

A Guangdong-based financial columnist says in an article that BlackRock's Chinese fund managers are not experienced enough to avoid mistakes such as investing in some highly fluctuating stocks, such as machinery supplier Suzhou Maxwell and solar panel maker JinkoSolar.

Over the past one year, Suzhou Maxwell has lost 59% while JinkoSolar has plunged 52%. The Shanghai Composite Index has only fallen 3.5% for the same period.

In June, BlackRock's China head Tony Tang resigned. This came after BlackRock saw losses in all its 12 China onshore funds. Tang then joined Citadel LLC, an American hedge fund, as its China head.

Over the past two years, BlackRock China New Horizon Mixed Securities Investment Fund A has dropped 29.9% while BlackRock China New Horizon Mixed Securities Investment Fund C has lost 30.55% .

Read: BlackRock, MSCI probed for investments in China

Follow Jeff Pao on Twitter at
@jeffpao3