No one should feel obligated to support China’s military build-up by investing in Chinese sovereign bonds. In a recent visit to Serbia, Chinese President Xi Jinping highlighted the historical ties between the two countries, but the focus remains on China’s growing military capabilities, which have raised concerns globally. Western investors, including major institutional investors and individual mutual fund owners, are unknowingly funding China’s defense spending by passively purchasing Chinese sovereign bonds that are included in global benchmarks.
Chinese defense spending has doubled since 2015 and is primarily funded through the state budget, which includes revenue from the issuance of sovereign bonds. These bonds are being included in global indexes by index providers, with little regard to the implications for investors or national security interests. The decision to add Chinese investments to these indexes has led to a significant flow of funds to the Chinese state, including the military, exacerbating concerns about the unintended support of China’s war machine.
Index providers, such as MSCI and Bloomberg, have faced pressure from Beijing to include Chinese assets in their benchmarks, with the threat of losing access to critical data. This pressure has influenced their decisions to add Chinese stocks and bonds to their indexes, ultimately redirecting capital towards authoritarian regimes. The inclusion of Chinese bonds in global benchmarks has forced investors who track these indexes to increase their holdings of Chinese securities, further contributing to China’s defense spending.
However, investors have the power to prioritize ethical investment practices and prevent unintentional support for adversarial regimes like China. Excluding Chinese bonds from benchmarks or offering “ex-China” indexes as default options for investors could provide a market-based solution to the issue. This would allow investors to make informed decisions about their portfolio composition and prevent passive investment flows from unknowingly funding China’s military build-up.
Improving the transparency and ethics of financial markets is crucial to addressing the impact of key decisions, such as the inclusion of adversarial bonds in global benchmarks. By promoting a deeper discussion about the implications of these decisions on investors, the global financial system, and the economic security of democratic governments, we can work towards ensuring that investment practices align with ethical standards and national security interests. In conclusion, no one should feel obligated to support China’s war machine through investments in Chinese sovereign bonds, and informed decision-making should guide investment practices in the global financial market.
