U.S.-China Economic & Security Review Commission
Hearing on
“China’s Presence in Global Capital Markets”
On behalf of the U.S.-China Economic and Security Review Commission, I would like to welcome you to today’s public hearing, the Commission’s final hearing of its 2003-2004 reporting cycle. During the past 10 months, the Commission has convened ten hearings, including field hearings in Columbia, South Carolina and San Diego, California. We are currently in the process of compiling the findings and recommendations related to our work over the past year in our Annual Report to the Congress, which will be released next month.
Our focus today is on the cutting-edge issue of China’s presence in the global capital markets, and the implications for U.S. investors, market regulators and, more broadly, U.S. security interests.
In setting out our mandate, the Congress took a broad view of the economic and security issues associated with the U.S.-China relationship. Our charge to examine, “Chinese access to, and use of United States capital markets,” demonstrates Congress’ recognition that U.S. investor funding of Chinese firms through our capital markets has become a substantial component of the U.S.-China economic relationship. Moreover, our mandated requirement to evaluate whether existing capital market disclosure and transparency rules are adequate to identify for investors any Chinese firms conducting, or involved in, activities harmful to U.S. security interests demonstrates Congressional concern about the identities and operations of certain Chinese firms accessing our markets.
As China’s economy has grown and restructured, the Chinese Government has recognized the importance of reaching out to the international capital markets. These listings open the door to an important pool of capital for Chinese enterprises, enhance the reputation of the firms involved, and could serve to advance economic reforms by subjecting listing firms to intensified financial scrutiny and discipline. The Chinese Government has the final say over which Chinese enterprises will be permitted to list on international capital markets, and to date has reserved this privilege almost exclusively for state-owned companies [Appendix 1, attached]. The number of Chinese initial public offerings (IPOs) in international capital markets is sharply on the rise this year, with some market analysts forecasting the volume for 2004 to exceed $23 billion [Appendix 2, attached].
This development has important implications for U.S. interests. Chinese state-owned enterprises listing on international capital markets generally remain under the control of the Chinese Government and play by corporate governance and transparency rules vastly different from U.S. norms. With billions of dollars in U.S. investor funds being attracted by these firms, it is vital to understand whether U.S. investors are being provided adequate information about their governance and financial performance, and whether U.S. regulatory requirements are sufficient to capture this concern.
As reflected in our Congressional mandate, the Commission also continues to be concerned about the potential linkages between listed Chinese firms and China’s defense-industrial complex and weapons proliferation activities. At a minimum, U.S. investors should be given adequate information about such activities in order to make more informed decisions as to whether they want to fund such companies. Such security-sensitive activities could also constitute a material risk to investors because of the possible negative impact on the share value and reputations of these enterprises. More fundamentally, the Commission is concerned about whether the U.S. Government is sufficiently monitoring this nexus and focused on the potential security implications.
The goal of today’s inquiry is to hear a variety of perspectives on the goals, methods and implications of Chinese firms’ use of global debt and equity markets to raise capital, particularly our own. This hearing takes place at a time of growing concerns over the governance and transparency of Chinese enterprises in the wake of several high-profile listings that have come under scrutiny. For example, the U.S. Securities and Exchange Commission recently announced a probe into New York Stock Exchange (NYSE)-listed China Life’s accounting irregularities and a trade secret theft and patent infringement suit has been brought in U.S. courts against NYSE-listed Semiconductor Manufacturing International Corp. (SMIC). These cases appear to have cooled investors’ appetite for Chinese IPOs, at least in the short-term.
Our opening panel will provide the Commission with an assessment of the trajectory of China’s presence in the global capital markets. We will hear from Professor Pieter Bottelier, Adjunct Professor at Johns Hopkins School of Advanced International Studies and Georgetown, and William Gamble, author of “Investing in China: Legal, Financial and Regulatory Risk,” who will discuss China’s capital needs and the role the U.S. and international capital markets have played -- and are likely to play in the future -- in addressing these needs. Tim Halter, of USX China Index, and Amit Tandon, of New York Global Securities will round out the panel with an explanation of what criteria are most often used when selecting Chinese enterprises for listings in global capital markets, how the performance of Chinese companies is quantified and which key Chinese IPO’s are on the horizon.
During our second panel, we will explore in-depth the corporate governance and other investor concerns that arise in the context of Chinese firms accessing our capital markets. Thomas Byrne, a Vice-President and Senior Analyst on China at Moody’s, will explain the unique htmects and challenges of rating Chinese equity and bond issues. Nell Minow, Founder and Editor of The Corporate Library, and Jeffery Fielder, President of the Food and Allied Service Trades department (FAST) at the AFL-CIO, will discuss China’s corporate governance and accounting standards, how they compare to U.S. standards, and what the implications are for U.S. investors. Norman Bailey is a senior fellow for the Potomac Foundation and served as Senior Director of International Economic Affairs at the National Security Council during the Reagan Administration from 1981 to 1983. Mr. Bailey will share his views on some of the national security implications of China’s presence in global capital markets.
When the Commission held its first hearing on this topic in December 2001, it was, to my knowledge, the first time that a U.S. Government body had publicly examined this emerging area of security risk. The Commission recognizes its leadership responsibility in this issue portfolio and will continue to evaluate this crucial component of U.S.-China relations for the benefit of the Congress and the American people. With that introduction, I would like to turn to our first panel.
APPENDIX 1
APPENDIX 2
SOURCES: 2001-2003 Dealogic
2004 Reuters (projection)