U.S. State Treasurers Urge Public Pension Funds To Divest From China | China Truths

Welcome to China Truths. Today we will bring you the following stories. U.S. finds major chipmaker for selling to company connected to Chinese military. U.S. state treasurers urge public pension funds to divest from China. Major Chinese airlines see significant profit drop despite record high passenger traffic. Now, let's dive into the details. It's all covered in today's China Truths. U.S. finds major chipmaker for selling to company connected to Chinese military. The U.S. Department of Commerce on November 1 fined GlobalFoundries U.S. Inc. $500,000 for shipping chips to Chinese firm SJ Semiconductor, a company that has been sanctioned by the United States for its ties to the Chinese military. GlobalFoundries is headquartered in Malta, New York, and has 14 locations around the globe, supplying to more than 200 customers worldwide. The company sold about $17.1 million worth of chips to SJ Semiconductor via 74 separate shipments, but voluntarily disclosed the information to the Commerce Department's Bureau of Industry and Security and cooperated with an investigation, resulting in a settlement, according to the bureau. We want U.S. companies to be hypervigilant when sending semiconductor materials to Chinese parties, stated Assistant Commerce Secretary for Export Enforcement Matthew S. Axelrod. And when, as here, that vigilance falls short and semiconductor materials have gone where they shouldn't, we want companies to make voluntary disclosures, remediate, and cooperate with us. SJ Semiconductor was sanctioned in 2020 and the shipments occurred in 2021 and 2022. According to officials, GlobalFoundries did not sell to SJ Semiconductor directly, and due to a data screening error, SJ Semiconductor was not identified as the contracted company that would assemble the purchased chips for GlobalFoundries' China-based direct client. SJ Semiconductor is tied to China's Semiconductor Manufacturing International Corporation, which, along with its related entities, was sanctioned in 2020 for adhering to China's military-civil fusion doctrine. The United States has in recent years taken steps to prevent China from acquiring advanced chips and the manufacturing technology needed to create their own, for national security reasons. A pillar of this initiative is the Biden administration's CHIPS Act, aimed at boosting domestic innovation in semiconductor technology. On November 1, the administration announced CHIPS funding for two research and development centers on opposite coasts. In Albany, New York, the government announced an $825 million investment in New York Creates Albany Nanotech Complex with the aim of supporting a national extreme ultraviolet, EUV, accelerator project. Advanced chips measure in the single-digit nanometers, which means the manufacturing of these chips requires technology capable of making layers the height of a single atom. EUV technology is necessary in such manufacturing, and Dutch company ASML is currently the only company capable of producing EUV systems needed to create 5-nanometer and 3-nanometer chips. The research and development component of the CHIPS and Science Act is fundamental to our long-term national security in ensuring the U.S. remains the most technologically competitive place on Earth, stated U.S. Secretary of Commerce Gina Raimondo. The same day, the U.S. government announced the opening of a second research and development facility, focused on design, in Sunnyvale, California. It will be headed by the public-private National Semiconductor Technology Center. U.S. state treasurers urge public pension funds to divest from China. A group of state treasurers and auditors have sent a letter to public pension fund fiduciaries, urging them to divest from China-based investments due to possible influence from the Chinese government. In a letter dated Nov. 1, 18 financial officers from 15 states stated that fiduciaries must adhere to their duties and realize that investments in China increasingly present red flags. Trustees of state funds have a duty to investigate investments and a duty to monitor investments and divest from imprudent investments in order to ensure that those funds grow and are protected for future beneficiaries, they wrote. The time has come to divest from China. The financial officers are from Alabama, Arkansas, Alaska, Arizona, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Pennsylvania, South Carolina, and Wyoming. Their letter cited a crackdown by China on due diligence firms and said that financial audits in China have been found to be unreliable. In early 2023, Chinese authorities raided three U.S. firms, Bain & Company, CapVision, and Mintz Group, in a sweeping crackdown on foreign auditing, consulting, and due diligence firms. In August last year, Commerce Secretary Gina Raimondo said American companies had complained to her that China has become uninvestable, pointing to raids on businesses as one of the concerns in the world's second-largest economy. The financial officers also pointed to the Chinese government's interference in the Chinese stock and bond markets, saying that they have recently observed China conceal foreign investment outflows and stop market participants from selling shares. The Chinese government exerts control over China-based companies, including by placing intelligence and military operatives within companies, the letter says. Another concern is how China has kept the legal status of Variable Interest Entities, VIEs, in a state of uncertainty, the financial officers wrote. Under the VIE structure, Chinese companies set up offshore entities for listing overseas, bypassing Chinese rules restricting foreign investments. In other words, investors own shares in shell companies and face risks such as a lack of legal remedy. The U.S. Security and Exchange Commission, SEC, warns on its website that China could suddenly determine that VIEs are illegal under Chinese law, creating significant loss for those investing in them. As of January 8, 265 Chinese companies were listed on the New York Stock Exchange, Nasdaq, and NYSE American, according to the U.S.-China Economic and Security Review Commission. Among them, 161 Chinese companies used the VIE structure, including Alibaba Group, Pinduoduo Inc., and JD.com. The financial officers said that the possibility of China invading Taiwan should also be considered a risk to investors. To make their point, they said that some states lost billions in pensions after failing to recognize warning signs before Russia invaded Ukraine in February 2022. Pension boards should learn from the past, or they will be doomed to repeat it, they wrote. Additionally, they said that foreign investment in China is rapidly declining. China's economy is facing a wide range of challenges, with industrial profits recording the steepest monthly decline in September this year. U.S. companies' optimism in China has fallen to a record low, according to a survey published by the American Chamber of Commerce in Shanghai in September. Similar fiduciaries are divesting from or avoiding China-based investments, including the Federal Thrift Savings Plan and state systems in Florida, Indiana, Kansas, Missouri, Nebraska, Oklahoma, Pennsylvania, Tennessee, and West Virginia, the letter says. In April, the House Select Committee on the Chinese Communist Party published a report noting that index providers and asset managers facilitate investments of more than $6.5 billion to 63 Chinese-flagged or blacklisted by Washington for advancing China's military capabilities or supporting its human rights abuses. As state financial officers, we urge public pension boards to analyze these issues, to identify China-based investments, and to divest from those investments in line with their fiduciary duties, the letter says. Major Chinese Airlines See Significant Profit Drop Despite Record High Passenger Traffic. China's three largest airlines, which are state-owned, reported a significant slip in third-quarter profits despite record high passenger traffic. Analysts say it's the result of China's falling ticket prices amid its ongoing sluggish economy. China Eastern Airlines reported a net profit of 2.63 billion yuan, or about $369 million, down 28.2 percent from the same period last year. China Southern Airlines, which is China's largest airline, said on October 28 that its third-quarter net profit fell 23.9 percent year-on-year to 3.19 billion yuan, or about $448 million, despite the airline serving more passengers. Data from China Southern Airlines showed that the company increased capacity by 11 percent in the third quarter compared with the same period last year, but operating revenue in the third quarter only increased by 4.6 percent, indicating that airfares have fallen. Beijing-based Air China reported on October 30 that its net profit in the third quarter was 4.14 billion yuan, or about $581.34 million, down from 4.24 billion yuan, or about $595 million, in the same period last year, or just over 2 percent. Aviation data company ForwardKey said that from January to September this year, the price of outbound air tickets from China fell 39 percent year-on-year. Meanwhile, Chinese airlines have been using cheaper fares in competition with European airlines, several of which canceled routes to China, citing unfair competition due to Chinese government subsidies. Spring Airlines, China's largest low-cost private airline, returned to profitability earlier than full-service rivals China Southern Airlines, China Eastern Airlines, and Air China after the COVID-19 pandemic. However, it also saw a net profit decline in the third quarter of this year, with data released on October 30 showing a 32.4 percent year-on-year drop to 1.2 billion yuan, or about $168 million. Average domestic airfares in China in July and August were 17 percent lower than last year and 1 percent lower than in 2019, according to Flightmaster, a China-based aviation data company. International airfares were 25 percent lower than last summer and 12 percent lower than in 2019, Flightmaster said. In the third quarter, Chinese airline passenger trips reached 200 million, which is a record high, according to official data. A recent report from aviation data and consulting firm Ishka said the significant gap between capacity increases and net profit growth suggests the economic situation in China is more severe than the slowdowns experienced elsewhere. Frank Xia, professor of business at the University of South Carolina Aiken said on October 31 that the main reason for the decline in profits is in the domestic market. Although the number of passengers is increasing, the decline in fares has led to the airline's decline in profits. The real situation is that China's economy continues to deteriorate, and people continue to tighten their budgets and look for other cheaper ways to travel, such as taking high-speed rail or driving their own cars. Airlines have to cut prices to survive. The result of price cuts is a decline in their profits. Chinese-American economist Davy Jay, Wang said on October 31 that Chinese airlines made a wrong decision on post-pandemic travel. They thought that consumption would rebound sharply, so they significantly expanded their fleets in recent years. Meanwhile, the Chinese government often uses purchases and negotiations with the European Union. Aircraft serve as a bargaining chip in the Chinese government's diplomatic negotiations. So we see that the number of aircraft and airline fleets increased by about 8 percent in 2023, increasing fixed expenditures and maintenance costs for the airlines. At the same time, flights and routes are rapidly decreasing, and revenue is dropping. In addition, the three major Chinese state-owned companies are also competing with each other in the market, the economist said. Wang said that the reason behind the decline in airline profits is China's sluggish economic growth and weak consumption. With the overall economic activity inactive, profitability declining, unemployment increasing, and serious aging population, ordinary people's incomes are tight and they are unwilling to spend more on high-end consumption, such as air tickets, big-ticket items, overseas travel, and cross-regional travel. In the international market, Wang said, Chinese airlines are limited by visa policies, international geopolitical risks, and weak overseas demand and opening overseas routes. China's ability to attract foreigners or foreign businessmen to invest, exchange, study, and visit China has also declined, which means that fewer companies and research institutions will come to China, leading to a decline in China's international influence and investment attractiveness in the future.