‘Circle the wagons’: State pension funds are dumping Chinese investments

A growing number of states are forcing public employee pension funds to divest from China, pulling out of the world’s second-largest economy because of hostility toward Beijing and fear that U.S. assets could be frozen if conflict breaks out in the Indo-Pacific.

Five states — Indiana, Florida, Missouri, Oklahoma and Kansas — have directed state fund administrators to begin the divestment process over the past year. And more are considering doing so — the latest sign of deteriorating relations between the U.S. and China.

“This is a great issue for folks to put politics aside, circle the wagons and say ‘We’re going to stand against the Communist Chinese Party and all the threats they pose to our nation,’” said Indiana state Sen. Chris Garten, who authored his state’s bill.

While the states that have taken such steps are heavily Republican, the trend reflects a souring in the perception of China in the U.S that goes beyond political parties. For years, pension funds clamored alongside U.S. companies to invest in a growing economy that many once believed would become less authoritarian as it modernized. Now the states are looking at China and seeing a pile-up of risks.

They aren’t alone. The Federal Retirement Thrift Investment Board, the main U.S. federal government pension fund, announced in November that it would stop investing in Hong Kong and China-listed stocks due to worsening U.S.-China friction.

Divestment also may make economic sense — the value of China’s stock index hit a five year low in February and Chinese policymakers failed to produce a credible roadmap to an economic rebound at a high-level meeting in Beijing last week.

But excluding Chinese investments from pension funds could be short-sighted. U.S. state pension fund managers “risk missing a potential bounce back if they let asset allocation be clouded by America’s pervasive anti-China sentiment,” said Stephen Roach, an economist and former chair of Morgan Stanley Asia.

Indiana passed its law last year barring investing in entities “controlled by the People's Republic of China or the Chinese Communist Party” and state pension funds have begun divesting. Indiana lawmakers said their concerns included China’s intellectual property right violations and espionage operations.

In Oklahoma, Gov. Kevin Stitt announced a series of measures last month aimed at shielding state tax dollars “from Chinese Communist Party aggression.” He ordered relevant agencies to draft divestment plans to protect state assets, including retirement funds, that could be vulnerable if Chinese leader Xi Jinping were to invade Taiwan or otherwise foment conflict in the Indo-Pacific.

“President Xi is looking at Taiwan and wants to have a united China at some point,” Stitt said. “I'm just trying to protect my state. … If something does come up [in the Indo-Pacific], I want to know what the exposure is to our pension plans,” Stitt said.

Other states have passed laws that require divestment from multiple countries with hostile U.S. relations, but the backers of those efforts have stressed that China is their main target.

The divestment initiatives are part of a wider effort in the states to separate from China. They include bans on land sales to Chinese entities and legislation requiring state-level “stress tests” to assess the local impact of war across the Taiwan Strait. Some states lost money tied to investments in Russia following its invasion of Ukraine in 2022 and want to protect themselves from the financial spillover effects of a potential Chinese invasion attempt of the self-governing island.

The fraught state of U.S.-China relations also makes divestment a political winner with voters on both sides of the aisle. According to a Pew Research Center survey last year , 83 percent of Amerians have “negative views” of China, and 4 in 10 Americans describe China as “an enemy” of the United States.

“China is not favorably perceived in Missouri,” said Missouri State Treasurer Vivek Malek, who led efforts to pull the state’s pension funds out of China last year. He is facing a hotly contested primary next month ahead of state elections in November and invoking the move in his campaign. An ad he released this week declares “China is a threat — they get no money from us.”

Perceptions of a wider threat that China poses to U.S. national security — including cyberattacks on U.S. infrastructure — is also a factor for Malek. In Florida and Kansas, part of the motivation has come from concerns about China’s human rights record — particularly allegations of genocide targeting Uyghurs and other largely Muslim ethnic groups in Xinjiang. Others cite Beijing’s role in fueling the U.S. opioid overdose epidemic .

State pension funds currently hold between 1 percent to 5 percent of their funds in Chinese investments, according to a January report by Future Union, a nonprofit organization that advocates for diverting private sector investment from authoritarian countries to democracies, and is funded and led by venture capitalist Andrew King. Data compiled by Future Union shows that state pension funds invested $68 billion in China from 2021 through 2023. The move toward divestment “isn’t a fast trend … but I think there are other [states] that are coming,” King said.

Missouri sees the divestment as “a defensive measure,” said State Treasurer Malek. “When Ukraine was invaded by Russia, our investments in Russia tanked and we do not want anything like that to happen with China, especially when our own intelligence has reported that China may be considering invading Taiwan,” Malek said.

Concerns about the likelihood of a Chinese invasion of Taiwan have risen since retired Adm. Phil Davidson, then-head of Indo-Pacific Command, predicted in 2021 that Beijing might move on the island as soon as 2027 . Taiwan’s defense minister fanned those fears later that year by warning that China would be capable of mounting such an invasion by 2025. But Pentagon officials have since expressed confidence that U.S. and Taiwanese deterrence efforts make such aggression unlikely anytime soon. A Chinese invasion of Taiwan isn’t “imminent or inevitable,” the assistant secretary of defense for Indo-Pacific security affairs, Ely Ratner, told reporters in December .

The state initiatives come after federal legislation aimed at blocking pension fund investments in China nationwide stalled in the Senate. The bill, introduced in 2022 by Sens. Josh Hawley (R-Mo.) and now-former Rep. Mike Gallagher (R-Wis.), would strip state pension funds of their tax-exempt status if they don’t divest from China. With only five months left in this congressional session during a presidential election year, it’s highly unlikely the bill will get any traction by the end of the year. Hawley declined to comment on the status of the bill.

The Kansas law, enacted in April, will divest state pension funds from China and four other “countries of concern” — Russia, Cuba, Iran and Venezuela. Kansas pension funds’ investments in China total $600 million to $700 million, according to state GOP Rep. Nick Hoheisel, who sponsored the bill.

Russia has blocked Kansas from liquidating holdings it had before the invasion of Ukraine, “so right now we consider those holdings sunk,” Hoheisel said. “We started having the conversation … if China does move on Taiwan, will the same thing happen? So we moved forward with this legislation.”

The bill prompted a partisan split — Kansas Gov. Laura Kelly, a Democrat, refused to sign it due to concerns about unspecified “unintended consequences” — a symbolic act that did not block its passage. Kelly didn’t respond to a request for comment.

Lawmakers who supported the bill said it would have minimal financial impact. The slowing in China’s economy had already prompted the Kansas pension fund to proactively start moving money out of those holdings.

“Our numbers showed us that the fiscal hit to our fund would be negligible,” Hoheisel said.

Kansas Rep. Rui Xu, a Democrat, initially opposed the divestment law out of concern that it would spur hate crimes targeting the state’s Asian American and Pacific Islander communities.

“Wariness of the CCP is certainly warranted, but the fear that I have as an Asian American would just be that it goes too far, that any resemblance of nuance gets lost,” Xu said. But he ended up voting for the bill “because it got bundled in with a bunch of other stuff” that he supported.

Pennsylvania’s Treasury pulled $394 million in state investments from China in 2022 following the sharp uptick in tensions across the Taiwan Strait after then-House Speaker Nancy Pelosi’s visit to the island in August of that year.

“It looked like there was a real possibility that there could be some sort of [Chinese] invasion. … I worried they could freeze those accounts at any time and we could lose out,” said Pennsylvania Treasurer Stacy Garrity.

That’s not enough for Pennsylvania Republican state Sen. Doug Mastriano. He has co-sponsored a bipartisan bill introduced in April that requires a “gradual divestiture” from China by both Pennsylvania’s Treasury and the state’s two largest pension funds. Mastriano’s motivation for the bill included concern about China allowing the easy black market trade of chemicals used to make fentanyl.

“How do we in good faith continue to invest in these companies when we know China is the source of almost all the fentanyl that has killed tens of thousands of Pennsylvanians?” Mastriano asked.

Florida’s law, passed in May, requires the agency that administers its pension fund to unveil a plan by September to dump Chinese investments and complete the divestment within a year. That legislation cites concerns about Beijing’s human rights record and economic policies. The Florida state pension fund’s China investments stood at $174 million in May, a fraction of the fund’s total $200 billion.

Taxpayers and state lawmakers alike didn’t want to “invest into a country that's not being totally transparent or hasn’t the best interests of Floridians at heart,” said Florida’s Chief Financial Officer Jimmy Patronis.