U.S.-China Economic & Security Review Commission
Hearing on
“China’s Presence in Global Capital Markets”
April 16, 2004
I would like to thank Chairman Robinson for focusing the Commission’s attention on the important topic before us, and today’s panelists for offering their informed perspectives on this issue. As the Chairman discussed, the economic and security challenges for the United States stemming from China’s incursion to the global capital markets is certainly one of the most unique issues in our mandate from Congress.
The vast majority of U.S.-listed Chinese enterprises – 92 percent – are owned and operated by the Chinese state. Questionable corporate governance, accounting practices, and minority shareholder rights make this a subject of particular concern to the Congress. These issues have significant implications for U.S. investors looking to purchase stock in Chinese firms, as well as financial analysts tasked with unraveling Chinese companies’ complex web of relationships and finances. These facts raise questions about the suitability of Chinese debt and equity listings in the U.S. markets, and so called “China funds” – mutual funds focused on investing in China securities. I am concerned that U.S. investors may not have sufficient information to make informed decisions about the risk of these investments. Furthermore, the possible links between listed state-run firms and China’s military industrial complex has here-to-for lacked comprehensive examination.
Is China using access to US capital markets as a supplemental budget mechanism? Do investors in the US know they are being lured into mutual fund positions that amount to financing the government of China? What are SOE's? They are State owned enterprises, economic units of the Chinese government.
Mr. Chairman, in a perverse way, this is genius. Here is a real suggestion to our Congressional Budget Committees, here is an idea for our Appropriations Committees. Here is a way to get at our budget deficit. Senator Byrd will be fascinated. Let's float stock in the US Defense Department on the Shanghai stock exchange, lets say an IPO for $10 billion. There goes two months of spending to keep us in Iraq. How much can we get for the dredging program at EPA? How about 10 percent of our Veterans hospitals? How about 15 percent of the Brooklyn bridge?
Mr. Chairman, SOE's are not transparent or accountable. It is nearly impossible to perform proper due diligence for investors. It gets worse when the due diligence for mutual funds, which pack in more and more SOE's, is done by unknown consulting firms in Hong Kong, paid by the mutual funds. Is the SEC protecting the average grocer from Des Moines who buys into the new "Asia fund" or "China Buckaroo fund" and gets shoddy due diligence on nontransparent economic units of the Chinese government. They are fattening their cash accounts at our expense? This trainload of new big IPO's of Chinese SOE's is heading over a rickety bridge.
I resist the idea of US. investors buying pieces of Chinese Brooklyn Bridges, and who knows what else, because of Wall Street broker hype. I fear the Wall Street crowd that brought us the hi-tech bubble is now fast creating a new China bubble.
We need to, at a minimum, shine a big new spotlight on how to perform proper due diligence on Chinese SOE's, and fast. I would ask whether a pause in this process is advisable before we have yet another financial scandal in our markets.
Taken together, all this suggests that China’s need to finance its economic expansion and support its state-owned enterprises with U.S. investors money demands the full attention of the U.S. Government.
I would also join the Chairman in noting that today marks the end of what has been a diverse and prolific public hearing schedule for the Commission over the past year of our 2003-2004 reporting cycle. We held 10 hearings touching on a variety of economic and security related topics as mandated in our Congressional charter. Security issues ranged from China’s military modernization efforts, cross-Strait relations, and China’s involvement in the North Korea nuclear crisis. On the economic side, we examined issues such as China’s industrial, investment and exchange rate policies, its progress in meeting its WTO commitments, and the implications of all this for the U.S. economy, particularly the hard hit U.S. manufacturing sector. Today, we are continuing our discussion of China’s economic policies, specifically, China’s presence in global capital markets. Taken together we believe these activities have established a solid foundation upon which to transmit our second Annual Report to Congress, due out next month.