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State to halt Chinese investments

FILE PHOTO: Chinese and U.S. flags flutter outside a company building in Shanghai, China April 14, 2021. REUTERS/Aly Song

• Decision impacts 1% of Wyoming’s portfolio

By Maya Shimizu Harris
Casper Star-Tribune
Via- Wyoming News Exchange

CASPER — Wyoming will halt its passive investments in China starting in July amid growing concern about the risks of investing in the country. The money that Wyoming currently has passively invested in China will be distributed across investments in other nations next month. 

Wyoming’s active investments in China — those that are managed and individually assessed for risk and return — will still be on the table. 

The move won’t significantly impact Wyoming’s investments; China only makes up roughly 1% of its entire portfolio, with just a portion of that accounting for passive investments. 

China is the second nation in recent years that Wyoming has pulled investments from: Russia’s equities dropped to pennies on the dollar following the country’s invasion of Ukraine early last year, prompting Wyoming’s investment managers to stop both the state’s passive and active investments there. 

But putting restrictions on investments in China, which has the second largest economy in the world, carries more weight. 

Though the country makes up a small portion of Wyoming’s overall investments, it accounts for roughly 8.5% of its overseas investment index, coming in third after Japan and the United Kingdom. (Russia, by comparison, doesn’t make the top 15 list of countries that Wyoming invests in). 

Wyoming isn’t alone in pulling some of its investments from China. Multiple Canadian firms have done so recently. What’s more, the Biden Administration also aims to restrict investments in China’s defense industry amid growing concern about the country’s military advantage. 

The decision to pull passive investments from China came after Wyoming Chief Investment Officer Patrick Fleming relayed to members of the State Loan and Investment Board last week his “growing concern” about the risks associated with these investments. 

He had talked with “numerous economists and China strategists” who said that embedded in China President Xi Jinping’s management of the country’s economy are “risks that are very difficult to quantify.” 

Fleming stressed that his concerns weren’t political in nature but rather focused on trying to “achieve the highest risk-adjusted return” for Wyoming. 

There are two kinds of investments: those that are passive, and those that are active. 

Passive investments only replicate an index and are used when good active managers are hard to find. They minimize buying and selling and assume that the market will generate positive returns over time. 

Active investments, on the other hand, are managed by people who assess each investment and country risk to decide whether or not the investment is worthwhile. They involve more buying and selling in the short term. 

It’s pretty hard for active investments to outperform passive investments in the U.S. But overseas, active management of investments “has really paid off,” Russell Read, a member of the state’s Investment Funds Committee, said at the SLIB meeting. 

Over the past three years, such investments have raked in $290 million more in revenue for the state compared to passive investments. 

Fleming told the Star-Tribune that members of Wyoming’s Investment Funds Committee had talked with State Treasurer Curt Meier and come to the conclusion that pulling passive investments from China while maintaining active investments made the most sense for Wyoming. 

The SLIB members unanimously agreed that nixing passive investments in China would be a wise move, though Secretary of State Chuck Gray was vocal about his opinion that Wyoming should go further and take China out of the picture entirely, saying in a statement subsequent to the meeting that he’s opposed to exposing Wyoming’s funds “to the whims of Communist China.” 

Wyoming could still have a diverse investment portfolio without China in the picture. But it would lose the opportunities that come with investing in a fast-growing economy, Fleming explained. 

Divesting completely from China would also be an “incredible difficult task,” Gov. Mark Gordon said. 

Since Wyoming’s investments in China are part of what’s called a “co-mingled” account, it would be a long process to set up separate accounts to continue investments in places like India and Hong Kong, Fleming explained to the Star-Tribune. 

Having those separate accounts would also cost more in fees. 

Meier estimated that this process would take around five years, with no guarantee of success. 

What’s more, there will always be some indirect China exposure throughout Wyoming’s investment portfolio since many companies are global, Sam Masoudi, a member of the Investment Funds Committee, explained during the meeting. 

That said, the possibility of Wyoming completely divesting from China could be on the table for the future. 

“I am completely willing to have that discussion of how we completely eliminate China,” State Superintendent of Public Instruction Megan Degenfelder said at the meeting. “I think today, we don’t have the information to quantify that and to know what that does to change our investment policies as well as the impact to our taxpayers.”

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