University endowments should divest from Chinese companies that could wind up being delisted on U.S. exchanges, a top State Department official said.
In a letter Tuesday to the governing boards of higher education institutions, Keith Krach, undersecretary for economic growth, energy and the environment, said divesting would be prudent "in the likely outcome that enhanced listing standards lead to a wholesale delisting of PRC firms from U.S. exchanges by the end of next year. Holding these stocks also runs the high risks associated with PRC companies having to restate financials," Mr. Krach said, referring to People's Republic of China firms.
Mr. Krach told the endowment boards that they "have a moral obligation, and perhaps even a fiduciary duty, to ensure that your institution has clean investments and clean endowment funds."
He also urged them to consider publicly disclosing all Chinese company holdings to their campus communities, "especially the PRC companies in emerging markets index funds."
Mr. Krach, a former board chairman of Purdue University, said Chinese companies connected to or controlled by the Chinese state present "a real and urgent threat that has broad implications for ensuring academic freedom, honoring human dignity, protecting university endowments, and safeguarding intellectual property," and responsibility for addressing that threat "sits squarely on the shoulders of each and every board member."
Mr. Krach also noted in the letter that Treasury Secretary Steven Mnuchin expects the Securities and Exchange Commission to adopt recommendations made Aug. 7 by a White House financial markets task force that would delist Chinese companies failing to follow tougher auditing rules and other listing standards that are in the works. The task force called for Chinese audit firms to share information with the Public Company Accounting Oversight Board, a U.S. regulator that oversees audits of public companies, broker-dealers and others. Chinese companies already listed would have until 2022 to comply or be forced to delist. Non-public firms planning an initial public offering on U.S. exchanges would have to comply first.
