Eighteen state treasurers and auditors signed a joint letter sent to public pension fund fiduciaries, urging them to withdraw from China-based investments because of possible influence from the Chinese Communist Party (CCP).

In a letter dated Nov. 1, 18 financial officers from 15 U.S. states stated that fiduciaries must adhere to their duties and realize that investments in China “increasingly present red flags.”

“Trustees of state funds have a duty to investigate investments and a duty to monitor investments and divest from imprudent investments, in order to ensure that those funds grow and are protected for future beneficiaries,” the letter states. “The time has come to divest from China.”

The financial officers are from Alabama, Arkansas, Alaska, Arizona, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Pennsylvania, South Carolina, and Wyoming.

The letter cited a crackdown by the CCP on due diligence firms and said that financial audits in China “have been found to be unreliable.”

In early 2023, Chinese authorities raided three U.S. firms—Bain & Co., Capvision, and Mintz Group—in a sweeping crackdown on foreign auditing, consulting, and due diligence firms.

In August 2023, Commerce Secretary Gina Raimondo said American companies had complained to her that China has become “uninvestable,” pointing to raids on businesses as one of the concerns in the world’s second-largest economy.

The financial officers’ letter also pointed to CCP interferences in the Chinese stock and bond markets, saying that they have recently seen China conceal foreign investment outflows and stop market participants from selling shares.

“The CCP exerts control over China-based companies, including by placing intelligence and military operatives within companies,” the letter states.

Another concern is that China has kept the legal status of variable interest entities in “a state of uncertainty,” the financial officers wrote.

Under the variable interest entity (VIE) structure, Chinese companies set up offshore entities for listing the company’s assets overseas, bypassing Chinese rules restricting foreign investments. In other words, investors own shares in shell companies and face risks such as a lack of legal remedy.

The U.S. Securities and Exchange Commission warns on its website that China could suddenly determine that VIEs are illegal under Chinese law, creating “significant loss” for those investing in them.

As of Jan. 8, 265 Chinese companies were listed on the New York Stock Exchange, NASDAQ, and NYSE American, according to the U.S.–China Economic and Security Review Commission. Among them, 161 Chinese companies used the VIE structure, including Alibaba Group, Pinduoduo Inc., and JD.com.

The financial officers’ letter also pointed out that the possibility that China will invade Taiwan should also be considered a risk to investors. To make their point, they said that some states lost billions in pensions after failing to recognize warning signs before Russia invaded Ukraine in February 2022.

“Pension boards should learn from the past, or they will be doomed to repeat it,” the letter states.

Additionally, it states that foreign investment in China “is rapidly declining.”

China’s economy is facing a wide range of challenges, with industrial profits recording the steepest monthly decline of this year in September. U.S. companies’ optimism in China has fallen to a record low, according to a survey published by the American Chamber of Commerce in Shanghai in September.

“Similar fiduciaries are divesting from or avoiding China-based investments, including the Federal Thrift Savings Plan and state systems in Florida, Indiana, Kansas, Missouri, Nebraska, Oklahoma, Pennsylvania, Tennessee, and West Virginia,” the letter states.

In April, the House Select Committee on the Chinese Communist Party published a report noting that index providers and asset managers facilitate investments of more than $6.5 billion to 63 Chinese companies flagged or blacklisted by Washington for advancing China’s military capabilities or supporting its human rights abuses.

“As state financial officers, we urge public pension boards to analyze these issues, to identify China-based investments, and to divest from those investments in line with their fiduciary duties,” the letter states.

Reuters contributed to this report.