China-Phobia Is Coming for Your 401k

Communist sympathizer. Propagandist. America hater. 

I've been called all of these things, simply for writing about the opportunity in China. Heck, I once quoted a few tweets and was called mouthpiece of the Trump administration... which just goes to show you can't please everyone. 

Name-calling just comes with the job. And to be honest, I understand it. 

Regardless of your intentions, people will read what they want into your writing. That's why I avoid politics as a rule. Instead, I strive to provide the best data I can... and the most honest interpretation. 

Still, occasionally a stupid idea bubbles up that's directly related to both finance and politics. And it has to be addressed. 

Well folks, today is one of those days. Two of our nation's senators want to tamper with government 401k and Thrift Savings Plans ("TSPs"). 

The reason? China-phobia. Pure and simple. 

So, let's dig inAnd if you feel the need for name-calling by the end, the "contact us" link is right at the bottom of this webpage... 

On September 30, CNBC published an open letter from Senators Marco Rubio (R-FL), and Jeanne Shaheen (D-NH). So you know what's coming next is at least bipartisan stupidity. 

The basic premises of the letter are pretty straightforward. Here's how I understood them: 

  • China is bad. 
  • Investment indexes (namely, global index provider MSCI) now include China as an emerging market. 
  • Most 401k and TSP plans use MSCI'indexes as their benchmarks. 
  • That means that the government is directly funding China'Communist Party. 

The first point is just politics. And like I said, I try to avoid that. So whatever you think of China, we'll set the first premise aside for now. 

Next, it is true that China has been added to the world's financial indexes. This one is a big deal... 

Regular readers know it means that trillions of dollars are flowing into China's markets. And as my friend and colleague Steve Sjuggerud has explained many times, it's righting one of global finance's most obvious wrongs. Thanks to this change, the world's second-largest stock market is finally part of the world's benchmark indexes. 

All this means that passive investing dollars are moving into China. That includes 401k plans that have exposure to emerging markets. So the letter gets this part right. 

The last point, though, is where the logic falls apartAnd I have a message I need to share with the senators... 

Buying a share of a company is not the same as handing cash to that company. 

Every investor knows this, right? "Buying shares" is literally what it says on the tin... It's buying a share of the business. 

After the IPO, the slices of ownership are traded around on the open market. And just to make it very clear, when you buy a share of the company, the company doesn't get a cut of the deal... 

It's a transaction between two private parties – the buyers and sellers on the open market. (Like always, the bank gets a cut in the middle... But that's a story for another day.) 

If you understand this, well, congratulations. You're smarter than a U.S. senator. 

Now, there's a lot more that'wrong about this letter(If you're curious, you can read it in full right here.) But this broken premise makes the rest of it mostly irrelevant. 

MSCI's inclusion of China in its indexes – indexes that are supposed to be the benchmark for world stock markets – does not mean U.S. citizens are "funding China's Communist Party." That's not how the stock market works. 

So, will the U.S. government force its employees out of their passive China investments? It's possible. Thankfully for the broader market, it would be a largely symbolic move. Money would keep changing hands across the world, just as it always has. 

But unfortunately for government employees, they'd be locked out of one of the world's fastest-growing markets. And over the long term, that could mean serious underperformance in their retirement accounts. 

Keep that in mind if this protectionist investing sentiment finds its way to your front door. 

Its main premise is broken. And at the end of the day, it'll hurt mom-and-pop investors... all so a few politicians can score a symbolic win. 

No thanks. 

Good investing, 

Vic Lederman 

P.S. If you're a China skeptic, that's OK. Most American investors are right there with you. That's why Steve has put together a feature-length documentary to give you an inside look at China's fast-moving economy... and to show you why you can't afford to miss this opportunity. The movie is called New Money. And you can watch it absolutely free right here.

Further Reading

"I was in the middle of America's heartland," Vic writes. "And I was looking at a symbol of China's expanding influence." To find out why Americans may see a lot more of China in the coming years – like it or not – read here.

"The money moving into Chinese stocks is a tailwind that will outlast any short-term fears," Steve says. Get a refresher on the MSCI inclusion – and on why it's a such a powerful opportunity for investors – right here.

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Market Notes



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HCP (HCP)... health care REIT
Invitation Homes (INVH)... residential REIT
Mid-America Apartment Communities (MAA)... residential REIT
Lennar (LEN)... homebuilder
PulteGroup (PHM)... homebuilder
Taylor Morrison Home (TMHC)... homebuilder
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Nike (NKE)... athletic apparel
Ross Stores (ROST)... discount stores
Dollar Tree (DLTR)... discount stores
Sysco (SYY)... food products
Sibanye Gold (SBGL)... gold


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TD Ameritrade (AMTD)... online brokerage
E-Trade Financial (ETFC)... online brokerage
CBS (CBS)... media
Viacom (VIAB)... media
Concho Resources (CXO)... oil and gas
Marathon Oil (MRO)... oil and gas