[Editorial] National Pension Service Must Assess Geopolitical Risks Before Investing

The National Pension Service participated in the Hong Kong IPO of Zhongyi InnoLight, an AI data center equipment manufacturer listed on the U.S. Department of War's list of Chinese military companies (CMC). Last month, it signed a total investment contract worth $250 million alongside funds under BlackRock and others. This came just 42 days after the United States designated the company as CMC. As cornerstone investors receiving shares at the pre-IPO offering price, they cannot sell until January 29 next year. Even if regulatory risks increase, recovering the investment will be difficult.

Investing in Chinese companies itself should not be an issue. Excluding companies from a portfolio en masse based on their country of origin contradicts the principle of diversified investing. The CMC designation does not immediately mean a ban on financial investments or confirmation of corporate misconduct. However, this is also not something to overlook.

The U.S. Department of War has prohibited direct procurement contracts with companies designated as CMC since June and will block indirect procurement involving products or services from these firms starting next June. More than 60% of Zhongyi InnoLight's revenue comes from the United States. The Federal Communications Commission (FCC) is considering restrictions on imports of Chinese-made optical transceivers, meaning the company could be excluded from the U.S. market and supply chain.

The U.S. House Select Committee on China investigated asset management firm BlackRock and index provider MSCI in 2023 and released a report stating that funds flowed into Chinese companies listed on their blacklist. It also recommended restricting U.S. capital investments in these firms. Last year, finance officials from 15 states urged public pension trustees to withdraw investments from China. Some state governments have begun efforts to recover Chinese investments or restrict new ones.

U.S. restrictions on China are expanding from telecommunications equipment and semiconductors to security and advanced technology items such as drones, industrial robots, power inverters, batteries, and solar components. Zhongyi InnoLight is also within the scope of these regulations. If import restrictions on optical transceivers materialize following the CMC designation, it could affect the National Pension Service's investment returns.

The National Pension Service must have been aware of these issues. The fund management guidelines consider unexpected losses and potential reputational damage as risks, allowing for limitations on investments in specific industries or corporate groups. Since it manages retirement funds for citizens, mitigating geopolitical shocks is equivalent to protecting returns. Through this investment, clear investment principles and criteria regarding geopolitical and economic security risks must be established.