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The Security Dimensions of Global Finance: The China Case

Friday, 11 May 2001 12:00 AM

"The Security Dimensions of Global Finance: The China Case”

Mar a Largo Estate

It’s a real privilege to have the opportunity to appear before such a distinguished gathering, and I’d like to express my gratitude to Allen Manning, Sumner Hushing and the Casey family, who made this occasion possible.

I recently finished reading a genuinely moving tribute entitled "Flags of our Fathers” by the son of a Navy corpsman who survived Iwo Jima, John Bradley. I’m sure that several here have read it. As the author took you through seemingly countless anecdotes of agonizing hardships in combat - and the tears they inspired - you couldn’t help but marvel at the fundamental decency, selflessness and valor of Americans during World War II.

Sacrifice for Americans who remained at home was also a common virtue, as captured by the wartime dictum: "use it up, wear it out, make it do, or do without.” So too, were the purchase of victory bonds by average Americans who repeatedly answered the call to invest directly in America’s brave fight for freedom.

Indeed, on March 7, 1945 - while the brutal struggle for Iwo Jima still raged on - then Representative Mike Mansfield took the House floor to initiate America’s seventh National Bond Tour. Mansfield proposed that the famous photograph of the flag raising on Mt. Suribachi be the symbol of this tour so that, in his words, "we as a people would do our part in keeping the flag flying at home as they have done in keeping it flying on foreign battle fields.”

Today, it’s my sad duty to report that many Americans are, often unwittingly, buying very different types of government bonds - those of the People’s Republic of China and the Russian government. To date, the total amount of Beijing’s and Moscow’s sovereign bond offerings in our markets has totaled roughly $17.8 billion.

What is worse, few if any questions have been asked by these investors about where that money - perhaps your money - was going, or how it was to be used. Such funds may have been used to reschedule debt or finance benign commercial activities like hydro-electric plants. But they may just as easily have been employed to help develop and build China’s DF-31 or Russia’s Topol M mobile ICBMs targeted at American families.

It is, in short, high time that we begin to focus on global "bad actors” increasingly funding themselves and their odious international activities in not only the U.S. bond market but in our stock exchanges as well. As we American investors do so, we need to ask, among many other questions: Is our money going to finance a baby food manufacturer - or to fund supplier credits for proliferation-related weapons sales to Iran or Iraq?

A prime example of the need for such a national "follow-the-money” effort involves the Communist government with the most voracious appetite for American capital: the People’s Republic of China. As you heard last evening, there is abundant evidence that China has emerged as the greatest threat to the national security of the United States as we enter the 21st century.

Like the recent stand-off with Beijing over our surveillance aircraft, we Americans didn’t cause this to happen. It was destined to eventuate when the Chinese leadership, years ago, identified us as their principal adversary - or, in their words, their "main enemy.” No false "strategic partnership” or largely one-sided engagement policy can paper over this unhappy reality.

Moreover, Beijing has cast itself in the role of the "Great Enabler” with regard to rogue state acquisition of weapons of mass destruction and ballistic missile delivery systems that put at risk U.S. forward-deployed forces and, ultimately, America itself.

The good news is that we are not without policy options concerning what we can do about the burgeoning Chinese threat before a crisis is upon us. Strengthening our vigilance and scrutinizing the inherent and emerging weaknesses of this large Communist competitor should be first orders of business. In the energy sector alone, China’s demand for oil imports will likely double by 2010.

Due to Beijing’s reluctance to render future Chinese economic growth vulnerable to the world’s spot markets for oil, Beijing has crafted what was - until recently - a strategically clever foreign oil acquisition strategy: Go to pariah oil-producing states where G-7 companies are discouraged (or prohibited) from doing business; offer large amounts of cash investment, conventional weapons and/or components for weapons of mass destruction and ballistic missiles; and, in exchange, secure contracts and oil concessions which provide China with dedicated physical supplies.

It is, at least in part, pursuant to this strategy that you find Chinese state-owned energy firms such as China National Petroleum Company and Sinopec in places such as Sudan, Iran and Iraq.

Something new has begun to interfere with this dangerous Chinese strategy, however: A growing coalition of non-governmental organizations (with combined memberships totaling as many as 20 million Americans) has succeeded in connecting the dots between the operations of PRC energy companies in Sudan and the use these state-owned entities are making of their access to the U.S. debt and equity markets to help finance Beijing’s partnership with the brutal regime in Khartoum.

In fact, the business China’s oil companies are doing with Sudan may be emerging as a case study applicable to several other categories of global "bad actors” seeking to raise funds in our markets, among them: proliferators, intelligence and technology-theft front companies, foreign firms partnering with terrorist-sponsoring regimes, advanced weapons manufacturers, firms linked to potentially hostile national militaries, arms smugglers, organized crime-affiliated firms, human rights abusers and religious persecutors.

The message is straightforward: We urgently need the Securities and Exchange Commission to adopt strengthened transparency and disclosure requirements in our markets so that American and other investors know the true identities and global activities of the foreign firms, governments and senior managements in whom they are being asked to invest.

If we, as a nation, were to pay greater attention to the destination of our funds, we would likely inflict serious costs on global "bad actors” - causing many to face possibly acute financial shortfalls. On the other hand, if we continue to turn a blind eye toward multibillion-dollar American financing of potential adversaries and wrong-doers, we will almost surely jeopardize not only our vital security interests, but perhaps over time our very survival as a nation.

Consider the following particulars:

Wang Jun is reportedly ineligible to receive a visa to enter the United States. What you may not know is that Wang Jun is also chairman of a $27 billion trading firm called China International Trust and Investment Corporation, or CITIC. Wang Jun’s CITIC is roughly $800 million deep in the U.S. bond market, and the stock of its affiliated companies, CITIC Pacific and CITIC Kah Wah Bank, are held by some of this nation’s largest public pension funds, including the California Public Employees Retirement System (CalPERS).

CNPC and its hastily configured subsidiary, PetroChina, launched in September 1999 an eight-month campaign to issue what was intended to be the largest initial public offering (IPO) of stock in New York Stock Exchange history - some $10 billion. The vigorous opposition of a broad coalition of non-governmental organizations from across the political spectrum, which the Casey Institute helped coordinate, together with warranted market skepticism, slashed the actual value of that IPO to under $2.9 billion. Nevertheless, it’s still held by some 40 or more major funds in this country, reportedly including Pennsylvania’s public pension system.

The latest effort to tap into the American investor community was scheduled for November of last year in the amount of $1-2 billion. The so-called "PetroChina Coalition” I just mentioned, made up of non-governmental organizations of nearly every political stripe, immediately initiated a direct-contact campaign with those responsible for over $1 trillion of total funds under management, urging them to avoid this undisciplined, imprudent investment.

The U.S. Commission on International Religious Freedom went even further and sent a letter to then-President Bill Clinton expressing deep concern over the offering on the grounds that the Chinese government engages in religious persecution. These coordinated efforts - almost all conducted outside of the U.S. government - were primarily responsible for the withdrawal of this sovereign bond offering. Unfortunately, all other things being equal, it is only a matter of time before Beijing will try again - probably this year.

There are several other troubling examples of the wrong sorts of Chinese government-affiliated enterprises in our markets, but the shortness of time does not permit a description of them here.

I realize that I’m speaking to a very free-market-oriented group. Let me assure you that, in urging remedial action to address these emerging challenges posed to our national security, human rights and other values, I am as anxious as any of you to avoid capital controls, undue government intervention in our markets or other measures which could impede the free flow of capital into and out of the United States. Our vibrant markets are the envy of the world and represent a pillar of our global competitiveness.

Indeed, this is precisely why the Casey Institute of the Center for Security Policy has pursued over the past five years what we call our Capital Markets Transparency Initiative (CMTI). By concentrating on limited but highly significant policy prescriptions - such as strengthening SEC disclosure and transparency requirements and encouraging the voluntary expansion of "due diligence” risk assessments by U.S. fund managers to include national security, human rights and other new forms of "political risk” - we have sought to remain consistent with market forces and practices. Only in the most egregious circumstances, have we felt compelled to oppose a specific foreign firm’s or government’s stock or bond offering.

I needn’t tell this audience that more transparency and discipline is a good thing for investors, particularly with respect to emerging market enterprises. Moreover, expanded political risk assessments represent a normal evolution of the marketplace, since these challenges have not been on our radar screen heretofore. Taking a stand on a specific foreign equity or debt offering, however, when there is an inordinate risk that U.S. investor money could go, for example, to help finance genocide, terrorism, proliferation and slavery in Sudan is a moral and civic duty, as well as a prudent financial decision. After all, even from a purely financial perspective, divestment and IPO opposition campaigns - not to mention potential U.S. government sanctions - can depress the value of targeted foreign securities.

Fortunately, the Executive Branch and the Congress are now actively exploring this new potent policy tool. Unlike trade sanctions, which typically require an unachievable level of multilateral cooperation and can inflict significant "collateral damage” on U.S. exports and jobs, rarely applied capital markets sanctions avoid the bulk of these shortcomings.

By contrast, thanks largely to the robust opposition of non-governmental groups, the U.S. Commission on International Religious Freedom and key members of Congress, China was forced to forego as much as 50 percent - or some $12-13 billion - that it had planned to raise on the U.S. capital markets last year. To put this figure in perspective, China reportedly raised a total of only $18.6 billion in the global capital markets last year.

In closing, Thomas Paine once said: "Those who expect the blessings of liberty must undergo the fatigues of supporting it.” My colleagues and I don’t think it’s too fatiguing for American investors and fund managers to insist on knowing where their money is going and how it’s being used. Likewise, we don’t think it’s an imposition to urge the SEC to broaden disclosure requirements to account for these valid, new market risks for investors.

And finally, a growing number of us are convinced by the facts that, if we as a nation of investors, entrepreneurs and decent, patriotic working folk fail to undertake these highly achievable tasks, we will end up unwittingly underwriting the debasement and endangerment of our liberties.

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The Security Dimensions of Global Finance: The China Case" Mar a Largo Estate It's a real privilege to have the opportunity to appear before such a distinguished gathering, and I'd like to express my gratitude to Allen Manning, Sumner Hushing and the Casey family,...
Friday, 11 May 2001 12:00 AM
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