Despite BlackRock passively investing for most clients, it wields immense power — both over the companies whose shares it holds, and through them over the American economy. This is because, even though BlackRock is not the ultimate owner of the shares it manages, it can vote those shares on behalf of its clients.
That tremendous voting power enables BlackRock to exert extraordinary influence over corporate management and policy. Those corporations are themselves often behemoths like Exxon and Microsoft. Moreover, BlackRock functions in an intensely oligopolistic environment. Only three other asset managers — Fidelity, Vanguard, and State Street — begin to compare with it in size and heft, and it is the biggest of them all.
BlackRock Touches Almost Everyone’s Daily Life
BlackRock is a major cause of corporate leftism in America, using its power to push for left-wing political priorities. In the just-completed third quarter of 2021 alone, BlackRock opposed the reelection of 800 company directors. In just one example, because of BlackRock’s leverage, big American oil company Exxon is considering dropping several drilling projects due to BlackRock removing board members and installing new members — despite the globe objectively being underinvested in energy production. If your gas costs more, think BlackRock.
BlackRock also contributes to the economy’s monopoly problem. Despite the unfortunate consolidation of power within a few large companies, the largest companies in a single industry should still be competing with each other head-to-head on price and quality. Thus, American Airlines, Delta, and United should all be seeking to provide better or less-expensive service to air passengers.
But BlackRock and the other big asset managers have “cross-holdings” in all of the largest players in the industry, a consequence of passive investing. Indeed, BlackRock and the other asset managers are often the biggest shareholders in each of an industry’s largest firms.
When this situation was analyzed in the airline industry, researchers found higher prices (less competition) on routes between two competing airlines when the airlines both counted the same “passive” manager as their largest stockholder (Eric Posner and Glen Weyl survey the evidence in their book “Radical Markets”). So if your air carrier loses your bags, provides shoddy service, or charges you too much, think BlackRock.
BlackRock is also a prominent cause of the unprecedented rise in housing prices that has killed the dreams of so many Americans to own their own homes. BlackRock is leading the way to buy up single-family homes, purchasing a large chunk of homes nationwide to list them as rentals. Of course, most of your “conservative” politicians have been silent about these problems and have proposed no hard-nosed policies to combat them, such as capping corporations’ ability to buy up single-family homes.
Here’s the kicker. While BlackRock is pushing corporate wokeness in America, they are also tight with China. China’s massive human rights abuses and carbon emissions (nearly double those of America) are not impediments to this relationship.
BlackRock wants market access to China’s huge but troubled economy, putting the Chinese Communist Party in a position to manipulate BlackRock and Wall Street. The company recently became the first foreign-owned company allowed to offer a set of mutual funds and other investment products for Chinese consumers.
China’s Economic Woes Are America’s Investments
First, take a step back. Chinese stocks have performed terribly in 2021. The Chinese economy is slowing, and the country has substantial underlying problems. The population is aging fast.
Meanwhile, the property sector is in trouble. Because of China’s state-run banking system, which underpays for deposits in order to subsidize loans for state-owned companies, and because of a lack of trust in China’s public markets, Chinese consumers have plugged money into property to amass multiple condos and flats. A large chunk of the sales in the last year alone were for “investment” purposes.
In other words, it is extremely common for middle-class Chinese families to sit on a half dozen flats or condos as a retirement asset, hoping to pass these along at a higher price when they need to raise cash in retirement. This type of behavior and market structure is unstable.
Chinese residential property is a $60 trillion asset class — the biggest in the world — and activity related to the property sector contributes to nearly a quarter of Chinese economic activity. China’s overall corporate sector sits on a massive debt load relative to the size of China’s economy. You’ve heard about this in the news if you’ve heard about Evergrande, but this is only one of many troubled property developers.
As China’s government confronts these problems, the government is also cracking down on industries and launching anti-monopoly measures, especially where the investors who lose out are mostly Americans or other foreigners. China’s industry crackdowns have been abrupt and sudden, and American investors have been taken without warning.
At the same time, many other Chinese companies have been subject to accounting scandals — a result of poor accounting standards in China and China’s unwillingness to allow their companies to be subjected to American accounting standards, despite these companies having many American investors.
Aside from ramifications for the Chinese economy if such a huge segment is troubled, American investors in offshore Chinese debt stand to lose out in particular. One might say these investors took their own risks and should face the consequences, and that’s probably true for investors in Chinese property debt. But many investors in Chinese equities are unknowing Americans who — through the likes of BlackRock — hold a large basket of Chinese equities in their retirement accounts.
BlackRock’s Conflict Of Interest In China
Despite all these concerns, Wall Street — led by BlackRock — is telling clients to buy Chinese investments. In August, after a particularly large crash in Chinese stocks, BlackRock said investors should triple their exposure to China.
In September, after Chinese investments fell further, BlackRock said investments in China should be increased because risks of government intervention were already priced in. JP Morgan and Goldman Sachs are also still selectively “bullish” on China (although maybe not as much as BlackRock).
To be fair to BlackRock and other Wall Street firms, China’s market looks cheap after this year’s crash, but there are many reasons investors should be wary about diving in. Investing 101 tells you that “cheap” stocks can remain cheap for a long time, and often get even cheaper.
Rupert Darwall, a senior fellow at the RealClear Foundation, warns that Wall Street in general, and BlackRock specifically, are at risk of Chinese pressure influencing their investment decisions. Legendary investor George Soros (even if you vehemently disagree with his politics, he is an extremely gifted investor) called BlackRock’s investing billions in China a “tragic mistake” that will harm U.S. national security and investors. Soros is right.
Let’s flush this out. Why does China care if Wall Street is telling its clients to buy, and how could these investment decisions harm national security? To put it bluntly, Wall Street appears to have a conflict of interest. Here’s how the New York Times’ Li Yuan put it:
Even while Beijing tightens its grip over business and the economy, it is giving global investment firms greater opportunities to serve Chinese companies and investors. At the height of a market sell-off in late July, the deputy chairman of China’s securities regulator, Fang Xinghai, summoned executives of BlackRock, Goldman Sachs and other firms to a meeting, trying to alleviate investor nervousness over Beijing’s crackdowns, according to a memo I reviewed. Some 20 days later, regulators approved BlackRock’s application to offer mutual funds in China. Around the same time, a BlackRock executive told The Financial Times that China was underrepresented in global investors’ portfolios and in global benchmarks. The firm recommended that investors boost their allocations by two to three times.
In other words, because China is so extremely intolerant, and because Wall Street wants to do business in China, Wall Street may be afraid to slap a “sell” on Chinese investments for fear of retaliation from the Chinese government. Worse, Wall Street might be incentivized to put more client assets in China in return for greater business access. Something similar appeared to happen when the index creator MSCI introduced a large weight to Chinese equities in its popular emerging markets index.
How This Harms US National Security
This potential conflict of interest harms national security in two ways.
First, aside from putting hard-earned American pension dollars at greater risk, sending money into China directly helps the Chinese Communist Party (CCP). The CCP is short of dollars, and needs more of them to sustain its system and keep monetary policy from becoming too tight.
Actions like screwing foreign investors make it likely that capital will flee China, not enter the country (although tight capital controls reduce the ability of capital to leave and, already, U.S. companies in China are having trouble pulling money out). If Wall Street is directing client accounts to greater China exposure, that’s helping fix a problem of reduced dollar inflows that the CCP created.
Second, this is a national security issue because if systemically important American firms with tremendous lobbying power are tied to China, we are prone to greater foreign influence on our politics and on our foreign policy.
Consider that the big media companies running pro-China coverage of the coronavirus origins — CNN, NBC/MSNBC, and ABC — all have substantial business ties to China via their parent companies AT&T, Comcast, and Disney, respectively. Consider also the Wall Street and multinational corporate lobbying against tariffs, simply because these firms are already tied to China. This wouldn’t be the first time corporate power negatively influenced U.S. policy decisions, either.
Politicians Must Act
BlackRock is emblematic of a larger problem with corporate America, and policy action is in order. Short-term and country-less globalist multinationals should get penalized for their business activities in China, including the pollution created there.
Companies like Nike and Amazon, which produce many of their products in China, pay far below what American small businesses or small corporations pay, simply because they are large and multinational, allowing them to manipulate their tax liability by shifting profits overseas (Nike’s effective tax is less than 15 percent and the company has paid no federal tax for several years).
Democrats are largely captured by these corporations; Democrats’ new tax bill will likely skip raising corporate taxes but increase small business taxes. But so are many Republicans, even though these corporations hate Republican voters. Such a political situation is unsustainable and ripe for a shakeup.
BlackRock deserves particular scrutiny. BlackRock activities, including voting of passive shares that enables monopolistic activity and pushes leftwing agendas in corporate boardrooms, and buying up single-family homes, deserve a policy response. A competent Congress would grill BlackRock executives about what threatens to look like a conflict of interest, where China induces behavior on Wall Street in return for market access. ✪