BLACKROCK Inc., MSCI Inc. and other firms are bracing for tighter oversight following a U.S. congressional probe over investments in Chinese companies deemed to be “national security threats” and an executive order curtailing specific investments in the Asian country.

More than 2,000 U.S. mutual and exchange-traded funds — particularly those tracking indexes — have US$294 billion invested across Chinese stocks and bonds, according to data compiled by Bloomberg, though not all of that money is invested in companies facing U.S. lawmakers’ scrutiny.

Vanguard Group, BlackRock, Fidelity Investments and DWS Group manage funds with investments in China, some of which are the type that U.S. Congress is investigating.

The Biden administration last Wednesday signed an executive order limiting U.S. investments in China in key technology industries. Separately, the House Select Committee on the Chinese Communist Party on July 31 alleged BlackRock funds are investing in Chinese companies acting against U.S. interests, demanding the asset manager hand over documents about the inclusion of Chinese firms in its funds.

The ties between the two countries’ businesses “haven’t frayed as much as a lot in Washington would like,” Martin Chorzempa, senior fellow at the Peterson Institute for International Economics, said. Certain U.S. lawmakers “would like to push for more of a decoupling.”

Last week’s order was narrower than expected, frustrating U.S. lawmakers who are pressing for tougher curbs on money flowing to Chinese firms. While the order applies mainly to private equity and venture capital firms, U.S. Congress may use the mandate as a springboard to grill money managers about investments in China.

The order is “a baseline that will likely be ratcheted up over time, particularly in terms of covered technology sectors,” Laura Black, senior counsel at Akin Gump Strauss Hauer & Feld law firm, said.

The Biden order restricted investments in semiconductor, quantum computing and artificial intelligence firms, and was narrowed during almost two years of deliberations to a more cautious approach.

The order, which will likely take effect next year, may end up excluding passive investments as well as those in publicly traded securities, index funds and other assets.

(SD-Agencies)