It’s time for ‘China risk’ to become a major concern for investors


As the annual shareholder meeting season wraps up, a curious phenomenon has emerged. ESG (environmental, social, and governance) initiatives with little connection to actual shareholder value have continued to garner investor support, while one initiative with a direct link to shareholder value has not: asking companies to disclose their dependence on China.

Last month, Comcast shareholders voted on just such a “China risk report,” following similar proposals at Apple, Disney, McDonald’s, Boeing, Intel, General Motors and Walmart this year. The proposals address a critical business threat that companies have generally overlooked. But such measures registered just single-digit support — largely because asset managers like BlackRock, State Street and Vanguard are unwilling to set their own China-related conflicts of interest aside.

Operating in China is risky business. The country’s decision-making is opaque, particularly after President Xi Jinping secured his norm-breaking third term last year. China’s zero-Covid policy shuttered retailers and manufacturers, upending supply chains; its abrupt reopening caught businesses equally unprepared. Its economic coercion strategy seeks to keep America dependent on the country for raw materials, manufacturing and market access.

China’s censorship policies have proven similarly challenging: when an NBA general manager tweeted support for Hong Kong, the Chinese Communist Party (CCP) retaliated by halting game broadcasts; when tech companies refuse to censor protests, the CCP blocks them; when H&M challenged China’s use of forced labor in Xiangjiang, the CCP erased the company from China’s internet.

These policies directly impact shareholder value. China’s decision to disappear H&M led China-based sales to drop 40%. Its Shanghai factory lockdown caused Tesla to miss vehicle deliveries, plunging share prices 12%. Its private tutoring ban caused U.S.-traded New Oriental’s shares to plummet over 90%.

Shareholders are asking questions, demanding to know how enmeshed American corporations are in China and what risks such investments pose. American companies currently disclose little about China risk, often burying a generic line or two in annual filings. Walmart, for instance, mentions China just once in discussing material risk factors, stating that “our international operations subject us to legislative, judicial, accounting, legal, regulatory, tax, political and economic risks” and that “we operate our business in Africa, Argentina, Canada, Central America, Chile, China,” etc. Which particular risks affect which countries is anyone’s guess.

Such reporting should not be controversial. An overwhelming 97% of Republicans and 90% of Democrats recognize that China’s economic power threatens the United States, and equal numbers of each party support challenging China’s human rights abuses even at an economic cost. Congressionally, laws countering Chinese economic power — the CHIPS Act promoting semiconductor manufacturing on U.S. soil, the Uyghur Forced Labor Prevention Act banning imports of Chinese goods made with forced labor — have enjoyed substantial bipartisan support. In the shareholder advocacy realm, China risk reports have had the backing of both right- and left-leaning groups.

Yet support at the corporate ballot box is wanting. Recent proposals asking for China risk reports have received less than 5% of the vote. They fail for a simple reason: most investors don’t vote their own shares. Instead, they’re voted by large asset managers like BlackRock, Vanguard and State Street — the “Big Three.”

At first blush, China risk reports seem right up their alley. The Big Three have been pushing ESG reports for years, demanding detailed disclosures on climate risks, water risks, and the risks of not having at least two women on company boards.

Why won’t the Big Three ask American companies to issue China risk reports? Because they are also dependent on China.

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