BlackRock, the world’s largest asset management firm, announced the closure of an offshore China equity fund after it was probed by a United States House Select Committee for allegedly funneling American investments into shares of blacklisted Chinese firms.
BlackRock Global Funds has decided to terminate the China Flexible Equity Fund, Denise Voss, chairwoman of BGF, said in a letter to shareholders, citing lack of new investor interest as the reason.
The fund has stopped further subscriptions from August 24, when its net asset value (NAV) was about US$21.4 million. Last year, the fund’s NAV decreased 30.5%. At the end of last year, it was 25% down from its initial level in October 2017.
Directors “do not expect to raise significant further subscriptions in the near future” and continuing to manage the fund at this size will result in a higher cost of investing which we believe is not in the best interests of shareholders,” Voss said.
The assets held in the underlying investment portfolio of the fund will be liquidated. All outstanding shares will be redeemed on or before November 7. Shareholders of the fund can also choose to switch their investments to another fund.
On Thursday, BlackRock told the media that its commitment to the Chinese market remains steadfast.
It denied rumors that it is withdrawing investments from China. It said the China Flexible Equity Fund is for offshore investors while BlackRock is not going to terminate its onshore funds that have raised money in China.
Scrutinized by US lawmakers
On July 31, BlackRock Chief Executive Larry Fink and MSCI Chief Executive Henry Fernandez were told by the US House Select Committee on Strategic Competition between the US and 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 of US investments 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 applicable US laws 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 the US legislators,” Chau Sze-tat, a political commentator, says on his YouTube channel.
“In the past, when US funds 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 before US President Joe Biden on August 9 signed an executive order that will restrict US funds 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, net income, capital expenditure, or operating expenses related to the covered industries. It means that US funds can still trade shares of Alibaba and Tencent although their units have invested in AI.
Dumping A shares
The Financial Times reported on August 31 that net sales 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