China Cashes In

Insight on the News, Jan 24, 2000 by J. Michael Waller

Unwitting investors may be financing nuclear proliferation and human-rights abusers as Beijing goes to the U.S. equity and bond markets for billions of dollars.

Is your individual retirement account bankrolling Communist China's nuclear-weapons program? Is that promising oil stock in your portfolio financing a war of extermination against Christians halfway around the world? Could your pension fund be weakened because it holds shares in companies about to be slapped with sanctions for investing in terrorist regimes? Chances are you don't know, even if you read the fine print in the prospectus.

Nuclear proliferators, terrorist states, foreign scam operators and Third World mass murderers literally have been banking on the failure of the United States to demand adequate transparency and disclosure of the equities and bonds they introduce in U.S. capital markets. As a result, unwitting American investors potentially have been pumping their cash into everything from Russian organized crime to a vicious ethnic-cleansing campaign in Africa to peddlers of weapons of mass destruction in Communist China. The big New York financial houses don't seem to care, say critics, as long as the money rolls in -- and the Asia growth funds that hold Chinese state firms are among the higher performers in the market.

No bank or brokerage house, no business-news organization and no government agency comprehensively follows People's Republic of China, or PRC, penetration of U.S. capital markets. Indeed, the first public exposure of this problem appeared in Insight in an article by Timothy W. Maier (see "PLA Espionage Means Business," March 24, 1997, and "U.S. Is Financing China's War Plan," May 12, 1997). A special House panel led by Rep. Christopher Cox, a California Republican, since has investigated Beijing's technological theft and found that the Securities and Exchange Commission, or SEC, "collects little information helpful in monitoring PRC commercial activities in the United States. This lack of information is due only in part to the fact that many PRC front companies are privately held and ultimately -- if indirectly -- wholly owned by the PRC and the Chinese Communist Party itself. Increasingly, the PRC is using U.S. capital markets both as a source of central-government funding for military and commercial development and as a means of cloaking U.S. technology-acquisition efforts by its front companies with a patina of regularity and respectability."

A bipartisan panel headed by former CIA director John Deutch has probed the threat of proliferation of weapons of mass destruction and also voiced concern that "known proliferators may be raising funds in the U.S. capital markets." The Deutch commission warned, "Because there is currently no national-security-based review of entities seeking to gain access to our capital markets, investors are unlikely to know that they may be assisting in the proliferation of weapons of mass destruction by providing funds to known proliferators. Aside from the moral implications, there are potential financial consequences of proliferation activity -- such as the possible imposition of trade and financial sanctions -- which could negatively impact investors."

Because of growing public awareness, however, this situation may be changing. Lack of transparency and disclosure was at the heart of the emerging-markets financial crisis, and Communist China is among the most opaque even though state-owned PRC entities have raised about $14 billion in dollar-denominated bonds since 1980. Now, a bipartisan initiative in Congress as well as nongovernmental grass-roots movements are turning up the heat -- just in time for an expected initial public offering on the New York Stock Exchange of a state-run oil company with ties to terrorist regimes.

Some California legislators were outraged last year when they discovered that CalPERS, the powerful California Public Employees' Retirement System, never considered national-security concerns in its investment decisions. State Sen. Raymond Haynes, citing a July 1999 report by Investors Business Daily's John Berlau, is concerned that California pension-fund holders unwittingly are funding the Chinese military. With more than $150 billion in holdings, CalPERS is the second-largest pension fund in the world. The newspaper report targeted four CalPERS holdings: CITIC Pacific Ltd., CITIC Ka Wah Bank, COSCO Pacific Ltd. and China Resources. CalPERS Chairman Charles Valdes blasted the article as "modern-day `McCarthyism' at its worst."

CITIC is the acronym for the China International Trade and Investment Corp., a huge mainland conglomerate that is integrated into the Beijing government through the People's Liberation Army, or PLA. COSCO, the China Ocean Shipping Co., is the PLA merchant marine. And China Resources, according to Sen. Fred Thompson, the Tennessee Republican who led a probe of secret Chinese funding of the Clinton-Gore reelection effort, is "an agent of espionage -- economic, military and political -- for China"