NEW YORK (Reuters) - Restricting the flow of U.S. capital to China would have a "devastating" impact on global markets, the head of index provider MSCI Inc MSCI.N told CNBC on Friday.

FILE PHOTO: Henry Fernandez, Chairman and CEO, MSCI Inc. speaks at the 2019 Milken Institute Global Conference in Beverly Hills, California, U.S., April 29, 2019. REUTERS/Lucy Nicholson

“If that happens, then we’re going to have a world in which the fuel that lubricates economic growth and prosperity in the world is cut off, the oxygen gets cut off, and therefore you end up with a global economy that is significantly smaller than we have today,” said MSCI Chief Executive Officer Henry Fernandez.

His remarks came after a bipartisan group of senators on Tuesday, led by Marco Rubio, a Republican, and Jeanne Shaheen, a Democrat, asked a federal retirement fund to reverse a decision to track a popular MSCI index that includes China. A failure to do so would lead to federal retirement funds being funneled into companies controlled by the Chinese government, they said.

These companies “assist in the Chinese government’s military activities, espionage and human rights abuses, as well as many other Chinese companies that lack basic financial transparency,” the senators said in their second letter to the Federal Retirement Thrift Investment Board (FRTIB.)

But if the United States, as the most open economy and democracy in the world, were to set severe restrictions on global capital flows, other countries would follow its example, Fernandez told CNBC at the Baron Investment Conference in New York.

The FRTIB said it was reviewing the matter.

The issue comes amid heightened U.S.-China trade tensions, and as the U.S. government considers delisting China-based companies from U.S. markets and limiting the flow of U.S. capital to Chinese companies due to security concerns about their activities, Reuters has reported.

Rubio also said MSCI does not vet companies from China that it includes in its indexes.

Fernandez said MSCI is an intermediary that does not invest any funds and only lets investors know what is available to buy and sell in global markets.

“We cannot tell investors what decision to make,” he said.

Ron Baron, the billionaire CEO of Baron Funds, which sponsored the conference, asked Fernandez what effect U.S. capital restrictions on China would have on the markets.

“Devastating,” Fernandez said. “Because right now there’s a trade war going on in the world and that affects supply chains. When you start having a finance war, in which you’re restricting the flow of capital around the world, that disrupts the financial system of the world.”