JAMESTOWN — Opponents of a bill to divest North Dakota Legacy Fund investments from Chinese companies say the legislation needs an amendment to the definition of a Chinese company.
House Bill 1330 would prohibit Legacy Fund investments from having direct holdings in Chinese companies. The bill was introduced by Reps. Mitch Ostlie and Bernie Satrom, both R-Jamestown, and Jim Grueneich, R-Ellendale.
Sens. Cole Conley, R-Jamestown, and Randy Lemm, R-Hillsboro, are carrying the legislation in the Senate.
Satrom presented information in support of HB 1330 at the House Industry, Business and Labor Committee hearing on Tuesday, Jan. 28.
The committee took no action on the bill on Tuesday.
Satrom said the Legacy Fund is or has been invested in Chinese companies that have been flagged by the U.S. government for assisting the Chinese military industrial complex and helping with the distribution and financing of the fentanyl drug trade. He also said some investments go against the interests of North Dakota.
Satrom said the Legacy Fund is currently or has invested nearly $230 million in 89 companies in China in the past four years. He said the 89 companies are only what has been disclosed in a few open records requests between 2021 and 2024.
“It's long overdue,” Satrom said, referring to divesting Legacy Fund investments from Chinese companies.
HB 1330 would require the State Investment Board to review all direct holdings of Legacy Fund investments to determine which ones, if any, include securities of a Chinese company. The State Investment Board would be required to develop a divestment plan for all direct holdings in Chinese companies and to divest at least 20% of the total value of Chinese investments held by Aug. 1, 2025.
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The bill also would require the State Investment Board to have complete divestment of direct holdings in Chinese companies by Aug. 1, 2030.
“I would like to see an amendment where we just get out of there by the end of the year,” Satrom said.
In 2010, North Dakota voters approved a measure that created the Legacy Fund, which is a perpetual source of state revenue from the finite national resources of oil and natural gas, according to the Office of State Treasurer’s website. Thirty percent of the taxes on petroleum produced and extracted in North Dakota are transferred to the Legacy Fund monthly, according to the North Dakota Retirement and Investment Office’s website.
The Legacy Fund has almost $11.5 billion as of Oct. 31.
The State Investment Board has statutory responsibility for the administration of the investment programs of several funds, including the Legacy Fund, according to the Retirement and Investment Office’s website. The board is the oversight board for the Retirement and Investment Office.
The State Investment Board opposes HB 1330, saying it increases the complexity of managing investment portfolios and impacts the ability to invest in developed market companies in an agile way, according to its written testimony. The written testimony says the State Investment Board would support the bill if the definition of a Chinese company was amended to a “company domiciled in China.”
Scott Anderson, chief investment officer for the North Dakota Retirement and Investment Office, said a cost-benefit analysis was done by RVK, an independent investment account consultant.
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Anderson said RVK’s analysis says the bill would impact more than $6 billion of the current investment funds in the Retirement and Investment Office’s care.
“The cost of this would be about $5.6 million a year in fees because we'd have to switch to less efficient, higher fee products,” he said.
Amending the language in the bill to say a Chinese company means a company domiciled in China would reduce the cost in fees to about $1.9 million per year, Anderson said.
“We have much more flexible management of our client funds,” he said.
Anderson also said it’s important for the State Investment Board to abide by the prudent investor rule.
“I have been told by legal advice that this would impact us from a prudent investor rule perspective,” he said. “There is a prudent investor rule specifically designed for the Legacy Fund, but it only applies to in-state manager preference. It does not say anything about China investment.”
State Treasurer Thomas Beadle, a member of the State Investment Board, said he supports the spirit to divest from Chinese-controlled companies but has some concerns with the language of the bill. He said Retirement and Investment Office staff need flexibility for indirect holdings.
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“If we're talking about ones (Legacy Fund investments) that have exposure to it from an operational standpoint or operations that are under the jurisdiction of China, that's when we get to Apple with their manufacturing facilities,” he said. “That's where we get to other companies that are operating in that area because they are in some way under some of the control of government policies within China based off of their exposure to that country.”
Beadle said the exposure of Legacy Fund investments in China is less than what is considered standard compared to the MSCI All Country World Index, a global equity index that measures the equity performance of developed and emerging markets. The MSCI All Country World Index says 4.5% of investments should have exposure in China, he said.
“Our exposure is like 2%,” he said.
If the bill becomes law, North Dakota will join six other states that have recently pulled their investments in China — Kansas, Indiana, Missouri, Oklahoma, Florida and Texas.
“The good thing is that six other states are like minded that they want to divest, which means that there will be funds … that are being developed,” Satrom said. “The good thing is that the big operators like Texas or Florida that have huge amount(s) of money are going to be requesting and demanding funds that are what I would suggest for our clean funds.”
Satrom said financial officers from 15 states sent a letter to their state pension fund fiduciaries urging them to divest from China.
Beadle said he missed the deadline to join the other state financial officers because he had a 24-hour turnaround time and was waiting for a response on the letter.
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“I fully agree with the intention,” he said, referring to HB 1330. “I don't intend to increase our risk in China.”