China hawks warn of Bejing's bonds

Insight on the News, Dec 22, 1997 by timothy W. Maier

China has a banking crisis, with $90 billion in nonperforming loans. Beijing acknowledges 20 percent of loans have gone sour, and the U.S. taxpayers could be made to bail them out.

The China hawks are armed with a get-tough-on-China bill that could limit Beijing's access to the U.S. capital market. The bill, called the U.S. Market Securities Act, sailed through a Senate Banking subcommittee last month and now is traveling full-speed ahead for a possible vote next year in the House and Senate.

Supporters say the measure takes the first step in providing both national-security protection and a safeguard for taxpayers by creating a screening process at the Securities Exchange Commission, or SEC, to monitor fund-raising activities of companies with ties to Beijing. Opponents say it will be an expensive federal regulatory nightmare that won't work.

But to Wall Street's dismay, the legislation is gathering strong support on Capitol Hill. The China hawks claim Beijing fails to disclose its business dealings with military enterprises. They fear that of the funds being raised by the Chinese communist regime, close to $7 billion from bonds, may be finding their way into the arms of the People's Liberation Army, or PLA -- the same army that rolled tanks into Tiananmen Square to crush a pro-democracy demonstration in 1989.

The U.S. Treasury Department does not restrict foreign countries from the bond market unless they are subject to embargo or trade sanctions, even if a national-security concern exists. The legislation doesn't sit too well with Wall Street. Economists warn that the day the bill is passed the Hong Kong flu that rocked the American stock market two days before the subcommittee held hearings on it will return with a vengeance.

A temporary market setback, however unlikely, is a small price to pay to ensure national security, says Roger Robinson, a senior director of international economic affairs at the National Security Council under President Reagan and one of the principal architects of the bill. "If China is not doing the wrong thing, it has nothing to worry about," he insists. "All we want is a list of names. The American people have inquiring minds and they want to know. What we want to know is who were the funders and suppliers that paid for weapons of mass destruction now held by Iraq. We can't answer that because we don't know."

Charles Wolf, dean of the Rand Institute's graduate school of political studies, doesn't buy the story that the money is supporting missiles for the PLA. Wolf says, "The hawks start the premise by saying China is doing as much as they can get away with, but that's like asking, How many angels can sit on the head of a pin? There is some indirect borrowing or some indirect leakage to the military, but it is not all that big a deal. What is a big deal is pursuing military modernization, especially the Russians. But that's something the intelligence agencies and military should do. I don't think that is the purview of the SEC."

But Robinson points to China International Trust and Investment Corp., or CITIC, which is run by kaffeeklatsch guest and PLA arms dealer Wang Jun, to show it's not the amount of money but the potentially devastating quality of some of these weapons. For example, CITIC received $800 million from 15 bonds, and some of those funds may have drifted into Wang's weapons company, Poly Technologies -- which last year was caught smuggling 2,000 AK-47 assault rifles to California street gangs and which tried to sell rockets capable of bringing down jetliners.

"How would we feel if a street gang shot down a national airliner?" Robinson asks. "When you have the wrong management with the wrong reporting structure and not a true corporate identity, you have the ingredients in today's information and technology age for world-class incidents and national-security challenges."

Leading the charge that is gaining considerable support on Capital Hill are Senate Banking subcommittee on Financial Institutions and Regulatory Relief chairman Lauch Faircloth of North Carolina and House Rules Chairman Gerald Solomon of New York. The bill these conservative Republicans introduced in the Senate and House also asks the Pension Benefit Guaranty Corp., a federal agency, to issue annual reports on communist China's securities that are held in the portfolios of pension funds -- a protection for the American taxpayer.

On Nov. 5, Solomon spelled out the significance of the bill by predicting economic warfare soon will supersede more-traditional forms of conflict. "With the emergence of the new global economy creating megamergers involving many foreign conglomerates, some of which are reported to involve international Mafia connections and drug-cartel monies, this Office of National Security within the SEC is an absolute must. In other words, we need a special watchdog agency specifically committed to making sure no entity can engineer fluctuations that could bring our markets down."

And Faircloth tells Insight the bill simply is trying to protect the hard-earned savings of the American taxpayer. "We must take steps to ensure that the average American investor enjoys the same market protection abroad that he does here stateside," Faircloth says. "In other words, the American investor must be alerted to the insider trading, adulterated disclosure and manipulated accounting standards commonly practiced in the debt and equity markets of countries such as China. Further, the American people need to be aware that through their pension and mutual-fund investments they may be unwittingly supporting the modernization of the Chinese military."