China knows that Wall Street is the gateway to America’s central nervous system. Finance controls capital. Wall Street is the conduit of highly valuable information about all sectors of the economy. It has privileged access in the corridors of power in Washington, D.C. And Wall Street can be bought.

In their book “Red Capitalism,” about China’s banking system, authors Carl Walter and Fraser Howie write of the role of Wall Street and the privatization of China’s state-owned enterprises (SOEs) in selling billions of dollars of shares in initial public offerings that “went off like strings of fire crackers in the global capital markets. All of these companies were imagined up, created, and listed by American investment bankers.” The creation of the new SOEs out of the dross of the old SOEs is the work of Wall Street bankers who provided the “lipstick, the mascara, the pedicure, the hair weave” so that they closely resemble Western corporations and can be sold at high prices, handsomely profiting the party and its friends and, of course, Wall Street banks. As the Indian stockbroker Shankar Sharma has noted, in just one Chinese bank IPO, the government paid Wall Street $200 million. “Research reports by Wall Street banks have always been up for sale to the highest bidder, and nobody knows this better than the Chinese.”

There has to be someone on the buy side to pay for all this Wall Street-minted SOE paper. Nearly 40% of the BlackRock-managed iShares Emerging Markets ETF is represented by this Chinese paper. How much of it is pure dross is hard to say, as U.S. regulators in the form of the Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act, are prevented from overseeing audits of these companies. That has rung alarm bells with the SEC, which has oversight responsibility for the board. On May 4, SEC Chairman Jay Clayton warned about the consequences of the inability of U.S. regulators to inspect for compliance and enforce U.S. securities rules and regulations. Such investing entails “significant disclosure, financial reporting and other risks,” Clayton said — risks that Main Street investors should better understand.

When the lipstick comes off the pig, it’s not a pretty sight. That happened to two companies in BlackRock’s emerging markets ETF only last month. On April 2, China’s Luckin Coffee announced that some of its employees, including its chief operating officer, fabricated 2.2 billion yuan ($310 million) in sales from the second quarter to the fourth quarter of last year. The SEC has announced that it is launching a probe into the apparent fraud. Five days later, Tal Education Group, a K-12 tutoring provider, announced that it had uncovered that one of its employees had inflated sales by forging contracts. Reports suggest that the fraud could have been taking place as far back as 2016. 

“You need a trusted partner who is not only an expert on China but can apply their knowledge, expertise and judgement in creating portfolios that can deliver the best of Chinese markets to you,” America’s largest asset manager says on the “Why BlackRock for China” page of its website. Noticeably absent is any warning about the lack of oversight and enforcement of U.S. auditing standards that so worries the SEC. Instead, there’s a statement on how the Chinese authorities are making their capital markets “more squarely aligned with international standards.” Pull the other one.

And while marketing Chinese investments that lack the basic auditing safeguards of U.S. companies, BlackRock is threatening to vote against boards that do not apply burdensome environmental reporting standards that have no statutory or regulatory standing — this, amid the deepest economic crisis since the Great Depression. BlackRock’s hypocrisy speaks for itself: punishing American companies that decline to apply entirely voluntary standards while being mute about Chinese companies’ lack of audit oversight and enforcement. There could hardly be a more blatant case of double standards.

BlackRock’s emerging markets ETF holds only about $300 million, a small fraction of the $7.4 trillion in assets under management that it held at its last year-end. But BlackRock is playing a bigger game. At the 2018 BlackRock investor day, the company identified China as a large and fast-growing market with $3.6 trillion of assets under management and limited foreign access. This year is meant to see the elimination of restrictions on foreign ownership of fund-management firms. BlackRock’s 2018 annual report highlights China as one of its largest growth opportunities, with Asia expected to drive 50% of the firm’s organic growth of assets under management. “China is a market BlackRock has long coveted,” the Wall Street Journal reported last year.

In a February speech to the National Governors Association, Secretary of State Mike Pompeo warned of Chinese officials bringing deals. Whether a governor is graded “friendly,” “hardline,” or “ambiguous” by the Communist Party of China, “know that it’s working you, know that it’s working the team around you,” Pompeo told the governors. “It affects our capacity to perform America’s vital national security functions.” The Chinese government has been methodical in the way it has analyzed our system and assessed our vulnerabilities. “Today they have free rein in our system, and we’re completely shut out from theirs.”

Against such asymmetric competition, the secretary of state suggested adopting a cautious mind-set when doing business. He highlighted one state pension fund investing in a company making surveillance equipment used to track China’s oppressed Muslim minority and another supplying the People’s Liberation Army. “All these things may well be legal,” he said. “But the question is: Do they demonstrate good judgment and preserve America’s national security?” That’s also a question that BlackRock, as the largest custodian of Americans’ savings, and its chairman and CEO, Larry Fink, should be asking in making itself beholden to the Communist Party of China while, at the same time, threatening American companies that are vital to economic recovery with frivolous proxy votes. And there’s a more basic question: Whose side is BlackRock on? Answers, please.