• The Chinese Government (through sovereign bond offerings) and Chinese state-owned and other enterprises have raised significant funds in overseas capital markets in recent years, including the U.S. capital markets. By some estimates, Chinese entities have raised more than $40 billion in international equity markets over the past decade, with more than $14 billion raised through initial public offerings in the U.S. capital markets in the past three years. Chinese issuers have raised an estimated $20 billion over the past decade from international bond offerings denominated in U.S. dollars.

• Chinese firms raising capital or otherwise trading their securities in the U.S. markets have predominantly been major state-owned enterprises, some of which have ties to China’s military, defense industry, or intelligence services. There is also concern that some Chinese firms accessing the U.S. capital markets may be assisting in the proliferation of weapons of mass destruction or ballistic missile delivery systems. The Chinese Government’s bond offerings, which have been purchased by U.S. institutional and other investors, provide scant detail on the use of the proceeds raised from such offerings.

• The U.S. Government lacks adequate institutional mechanisms to monitor national security concerns raised by Chinese and other foreign entities seeking to raise capital or otherwise trade their securities in the U.S. debt and equity markets. Moreover, Securities and Exchange Commission (SEC) reporting requirements for foreign registrants provide insufficient disclosure to the investing public of the national security risks related to certain foreign entities’ global business activities, including the material risks associated with entities that do business in terrorist-sponsoring states.

As a component of the Commission’s statutorily mandated assessment of the trade and capital flows between the United States and the People’s Republic of China, the Commission examined the national security implications of the significant presence of Chinese entities in the U.S. capital markets. China’s economic growth and development has been powered to a large extent by foreign investment. While the bulk of this investment has been in the form of FDI, an important element in recent years has been foreign investment accumulated through the debt and equity offerings of Chinese entities in overseas capital markets, particularly in the U.S. markets.

The past few years have seen numerous Chinese companies, including some of China’s largest state-owned enterprises (SOEs), enter the U.S. capital markets and raise impressive sums of money. Moreover, Chinese U.S. dollar-denominated bond offerings have netted substantial sums as well. Given China’s projected capital needs over the coming decade, as discussed in Chapter 3, it appears likely that the Chinese Government and Chinese SOEs will continue to look to the U.S. capital markets as a key source of financing.

The presence of Chinese debt and equity offerings in the U.S. capital markets raises U.S. national security concerns that have not been adequately examined to date. The Commission is concerned about the identities and nature of the Chinese companies accessing the U.S. capital markets. Specifically, the extent to which they have ties to the People’s Liberation Army (PLA) or components of China’s defense industry, intelligence services, or are assisting in the proliferation of weapons of mass destruction or ballistic missile delivery systems. The Commission is also concerned with those entities operating in U.S.-sanctioned countries, or are otherwise engaged in activities inimical to U.S. interests. Second, the important role the U.S. capital markets play as a source of funding for Chinese entities suggests an area of leverage for the U.S. in its relationship with China that should be assessed as a potential sanctions tool for combating China’s proliferation activities and other actions inimical to U.S. security interests.

The Commission devoted particular attention over the past year to examining these issues in an effort to raise awareness of this emerging national security concern. The Commission held a full-day hearing on this topic on December 6, 2001, receiving testimony from a broad spectrum of witnesses including Senator Fred Thompson, U.S. intelligence officials, experts on the Chinese economy, investment analysts, major institutional investors, and Wall Street representatives. Additionally, the Commission contracted with outside researchers to provide detailed assessments of China’s capital needs and the scope of its activities in U.S. and other international capital markets.¹

According to an analysis done by Morgan Stanley Dean Witter and the Wall Street Journal, reprinted in Figure 6.1, Chinese firms raised approximately $41 billion through initial public offerings (IPOs) and placements in international equity markets from 1993 through 2000, $21 billion in 2000 alone. This analysis did not cover 2001, but other sources indicate that there was a significant drop-off last year due to the global economic downturn.

Source: Morgan Stanley Dean Witter/Wall St. Journal

Figure 6.1 also shows the comparative amounts raised on domestic and overseas markets. The amounts raised domestically have historically exceeded the amounts raised on overseas markets, often by a significant margin. In 2000, overseas equity fundraising by Chinese entities overtook domestic equity fundraising for the first time. Given the curtailment in Chinese overseas offerings in 2001, it can be expected that the amount generated on domestic markets last year again exceeded overseas fundraising.

China has also raised significant sums internationally through its sovereign and corporate bond offerings. As shown in Figure 6.2, Chinese sovereign bonds garnered $8.5 billion and corporate bonds raised $26 billion from 1986 through 2001. With regard to the corporate bond offerings, only certain types of state-controlled entities — international trade and investment corporations (ITICs), state-owned banks and enterprises, and Hong Kong-based SOEs - have raised capital through international bond sales. The bulk has been raised by the ITICs, a class of Chinese financial institution, under the control of the central or a provincial or municipal government, that nominally raises foreign capital for infrastructure development but often invests instead in real estate or the stock market. When the Guangdong ITIC (known as GITIC) defaulted on payments to its creditors in 1996-97, and the central government did not step in to pay off the debts, the ITIC lost its credibility as a vehicle for raising capital. The problems with the ITICs, coupled with the Asian financial crisis, led to a significant reduction in Chinese international bond fundraising beginning in 1998.

Source: Bloomberg Professional Service (data compiled by USCC staff)

As Figure 6.3 indicates, Chinese entities have historically preferred to issue debt in the international bond markets in either Japanese yen (mostly through so-called Samurai bonds) or US dollars, raising approximately $20 billion in dollar-denominated bonds in the past decade. The Chinese Government typically has issued sovereign debt in U.S. dollar-denominated paper, but in 2001 the Government made its first Euro-denominated sale and raised $600 million.

Source: Bloomberg Professional Service (data compiled by USCC staff)

Hong Kong has historically played a significant role as a gateway for mainland Chinese companies to access the world’s capital markets. Before economic reforms in the Mainland progressed to the point where firms were able to directly raise capital through financial markets, many Chinese companies seeking access to international capital markets set up Hong Kong subsidiaries and raised capital as Hong Kong firms. Although several high-profile Chinese offerings in the U.S. capital markets have been made by Hong Kong subsidiaries of mainland firms — China Mobile, China Unicom, China National Offshore Oil Corporation — the majority of Chinese offerings in the United States have been made by mainland-incorporated firms.

The Hong Kong Stock Exchange (HKSE) is considered one of Asia’s largest and most respected financial markets. But its disclosure requirements, capitalization requirements and securities regulation environment are less stringent than those in the United States. There are two types of mainland Chinese companies in the Hong Kong market: "H-shares," which are companies that are floated on the HKSE but incorporated in the Mainland, and "Red Chips," which are Hong Kong-incorporated companies that usually are subsidiaries or otherwise affiliated with larger mainland SOEs or government ministries.

The Chinese Government has historically conducted the sale of its sovereign bonds in Tokyo, New York or London. The Hong Kong Government reportedly has approached the Beijing leadership about using Hong Kong as the base for the sale of China’s sovereign bonds, including U.S. dollar-denominated bonds. News reports characterized the move as "the latest attempt by Hong Kong Government officials to lobby the Mainland to use the SAR as a fund-raising center to boost its capital markets."²

Chinese companies access the U.S. equity markets, both to raise capital or otherwise trade their securities, primarily through the issuance of American depositary receipts (ADRs), including Level I, II, and III ADRs and Rule 144A and Regulation S offerings.³ The Bank of New York’s ADR directory listed 38 Chinese ADRs as of May 31, 2002: 12 Level I, 1 Level II, 15 Level III, 7 Rule 144A and 3 Regulation S.⁴ This list is reprinted in Appendix A.

The precise amount that Chinese entities have raised in the U.S. capital markets is difficult to pinpoint, however the range of estimates presented to the Commission by various sources give an idea of the scope involved. Marc Lackritz, President of the Securities Industry Association, testified that Chinese entities had raised $48.3 billion in equity capital overseas from 1991-2000, and that about 7 percent of this amount — or $3.4 billion — had been raised through targeted U.S. offerings.⁵ He further indicated that Chinese issuers of debt raised around $9.7 billion in the U.S. markets during that time period.⁶ Paul Wolansky, Managing Director of New China Management Corporation, testified that Chinese companies raised approximately $10.6 billion through listings in U.S. equity markets since 1999.⁷

A report prepared for the Commission on China’s fundraising activities in the U.S. equity markets concludes that Chinese firms raised approximately $14.6 billion through IPOs in U.S. capital markets from 1999-2001, representing 73 percent of the $20 billion Chinese firms raised in total through overseas IPOs during that time period.⁸ The report’s findings are indicated in Figure 6.4.

The most significant Chinese equity offerings in the U.S. markets — by both mainland firms and Hong Kong subsidiaries of mainland firms — have been listed on the New York Stock Exchange (NYSE) and predominantly have been state-owned enterprises (SOEs) from the energy, telecommunications, and transportation sectors. The Chinese companies listing on the NASDAQ generally have been smaller, Internet and technology-related firms that have "private" management but SOEs as strategic investors. The NASDAQ’s lower capitalization requirements make it attractive to smaller Chinese firms seeking access to U.S. capital.

The most significant Chinese IPOs in the U.S. market to date have all involved companies in the telecommunications and energy sectors. Below is a brief description of the largest offerings over the past three years, all of which involve SOEs listing on the NYSE.⁹ In some cases the listed entity is a Hong Kong subsidiary of a mainland firm. In all cases, the PRC remained the majority shareholder after the IPO.

• China Unicom Limited (NYSE: CHU) - Raised $4.9 billion in an IPO in June 2000. China Unicom is China's dominant paging company and the nation’s second largest mobile phone operator

• China Petroleum and Chemical Corporation (Sinopec) (NYSE: SNP) - Raised $3.5 billion in an October 2000 IPO. Sinopec is China’s largest refiner and petrochemical producer with former operations in Sudan and a current development contract in Iran that exceeds the limits outlined in the Iran and Libya Sanctions Act.¹⁰

• PetroChina Company Limited (NYSE: PTR) - In 2000, PetroChina set out to raise $10 billion in its first U.S. IPO, which would have made it the largest international IPO in NYSE history. Largely due to public opposition from a broad coalition of non-governmental groups in the U.S. protesting PetroChina’s parent company’s holdings in Sudan, the offering ultimately raised only $2.9 billion on the NYSE in April 2000. PetroChina produces two-thirds of China’s oil and gas.

• China National Offshore Oil Corporation (CNOOC) Limited (NYSE: CEO) - Raised $1.3 billion with its February 2001 IPO. CNOOC Limited runs China's offshore oil and gas exploration and production activities in partnership with international oil and gas firms.

China delayed many IPOs in 2001 due to unfavorable market conditions, but several are scheduled for 2002. The major IPOs in the pipeline again involve SOEs in the telecommunications and energy sectors as China continues to list the offshoots of what were once large monopolies. Among the notable expected IPOs are China Telecom, Bank of China, China Power, and Baosteel. The Bank of China IPO would be the first in China’s banking sector. A recent wave of scandals at the Bank of China, including its agreement to pay $10 million in fines to the U.S. Office of the Comptroller of the Currency for misconduct at the bank’s New York branch, reportedly has played a role in delaying its planned listing on the NYSE.¹¹

On the debt side, Chinese companies may be entering an era of increased fundraising via bond offerings. CNOOC, which raised significant funds through its listing on the NYSE, recently offered a $500 million, 10-year bond issue. The demand for this issue reached $4.2 billion when the books closed, about 20 percent of which came from U.S. investors.¹² Chinese corporate bond issues had been sparse in recent years — most notable have been China Mobile’s $600 million issue in 1999 and Citic Pacific’s $450 million issue last year.¹³ Some market analysts believe that the success of the CNOOC issue will encourage other SOEs to tap the international bond markets, possibly in lieu of the equity markets.

There has been an increasing concern in recent years about the identities and nature of certain Chinese companies raising money or otherwise trading their securities in the U.S. capital markets and their affiliations with the PLA or components of China’s defense industry or intelligence services. In addition, concerns have been raised about whether any Chinese entities listed in the U.S. capital markets may be assisting in the proliferation of weapons of mass destruction or ballistic missile delivery systems. This issue has direct implications for U.S. national security and raises questions about whether the U.S. intelligence community is sufficiently focused on this potential source of funding for China’s military and weapons proliferators, as well as whether U.S. investors are sufficiently informed about the activities and affiliations of the Chinese companies in which they invest.

Senator Fred Thompson voiced his concerns about U.S. investors funding, through portfolio investment, Chinese companies linked to the PLA or weapons proliferation in testimony before the Commission:

The Chinese companies cited in Senator Thompson’s testimony all sold their shares to U.S. investors through listings in Hong Kong. A report prepared for the Commission by Adam Pener of the William J. Casey Institute provides background on these and other publicly listed Chinese companies that reportedly have connections with China’s military establishment.¹⁵ These examples highlight the reality that U.S. investors, including sophisticated pension and mutual funds, may be unknowingly funding Chinese companies that pose a security risk to the United States through their purchases of overseas listed securities. While this security risk is of concern to the Commission, the Commission decided to focus initially on the extent to which Chinese firms directly trading their securities in the U.S. capital markets may present a similar risk, and the extent to which the U.S. Government and investment community are alert to this challenge. The flow of U.S. portfolio investment into Chinese securities listed outside the U.S. capital markets, particularly by public pension funds and other large institutional investors, is an issue the Commission will explore in future years.

The Commission notes the findings of two other bipartisan federal commissions that expressed concern about the presence of certain Chinese and other foreign registrants in the U.S. capital markets. The report of the Committee on U.S. National Security and Military/Commercial Concerns with the People’s Republic of China (the "Cox Commission") concluded that:

The Commission to Assess the Organization of the Federal Government to Combat the Proliferation of Weapons of Mass Destruction (the "Deutch Commission") found that:

Among its recommendations, the Deutch Commission concluded that appropriate U.S. Government officials should "assess options for denying proliferators access to U.S. markets" and further advised that "[a]ccess to U.S. capital markets . . . [is] among the wide range of economic levers that could be used as carrots or sticks as part of an overall strategy to combat proliferation."¹⁸ This suggests that denying access to U.S. capital markets could be used as an economic sanction against governments that fail to adequately curtail their proliferation activities.

The PLA was at one point heavily involved in commercial business enterprises, with some of its companies, such as Poly Group and China Carrie, securing listings on the Hong Kong Stock Exchange.¹⁹ China Aviation Industry Corp II (AVIC II), a state-owned aviation company under the direct control of the State Commission of Science Technology and Industry for National Defense, reportedly is planning to list in Hong Kong in the near future, and will be followed to the market by China’s other key military business conglomerates.²⁰ While the level of PLA involvement in the commercial sector has apparently decreased in recent years as a result of China’s campaign to divest the PLA from its business holdings, there continue to be relationships between the PLA and commercial enterprises. The full extent of relationships between the PLA and other organs of the Chinese military-industrial complex and Chinese firms raising funds in the U.S. capital markets merits further study.

Overlaying these specific concerns is the issue of Chinese sovereign debt issuances. Since China’s bond prospectuses generally provide little detail as to how the proceeds will be spent, the significant monies raised by these offerings could be finding their way into military spending and other activities that are harmful to U.S. security interests. Because money is fungible, funds raised by China from its general-purpose bonds are just as useful for military and other security-related purposes as funds raised by a PLA-affiliated company.

At the request of Senator Thompson, the U.S. General Accounting Office (GAO) recently investigated whether any Chinese or Russian companies associated with the proliferation of weapons of mass destruction have been raising funds in the U.S. capital markets and to what extent the U.S. Government monitors access to the markets by such firms. The Commission was briefed by the GAO on the findings of its investigation on April 26, 2002. Due to their classified nature, the Commission will address those findings that are pertinent to its examination of this issue in the classified annex to this Report.

The Commission is concerned about the use of the U.S. capital markets as a source of funding for the Chinese military and intelligence services and for Chinese companies assisting in the proliferation of weapons of mass destruction or ballistic missile delivery systems. This activity not only poses direct security concerns, but raises issues regarding investor transparency and material risk as well. Given this dynamic, the Commission is troubled that neither the U.S. Government nor the U.S. investment community is adequately evaluating security-related risks related to China’s fundraising in the U.S. capital markets.

As U.S. policymakers struggle to develop new approaches to more effectively curtail weapons proliferation, the substantial role the U.S. capital markets may play in funding companies that assist in proliferation should be evaluated more closely. Any comprehensive approach to combating proliferation should address all sources of financing. It would seem to make little sense for the U.S. Government to sanction trade with Chinese companies that assist in proliferation, while allowing these same companies to fund themselves in the U.S. capital markets.

The presence of PLA and other Chinese military-linked or intelligence-linked companies in the U.S. capital markets is also troublesome. The Commission recognizes that military and commercial production in China are often intertwined and that it is difficult to ascertain when monies raised by Chinese SOEs in the U.S. markets may ultimately be used for military purposes. Further complicating this issue is the fact that funds raised by China through sovereign bond offerings are not tied to specific governmental purposes, so the proceeds of these bonds may also be going into military programs. However, at a minimum, U.S. investors should be made aware of any materially relevant ties between the Chinese military and intelligence services and Chinese companies listing in the U.S. markets so they can make informed investment decisions. U.S. investors should also be made aware of such ties with regard to overseas-listed securities offered for sale through U.S. brokerages.

In this regard, the Commission notes the SEC’s decision last year to incorporate national security concerns into its interpretation of "material" information that should be disclosed to investors. On May 8, 2001, in a letter from then-Acting SEC Chairman Laura Unger to Representative Frank Wolf, the SEC announced guidelines to increase the transparency of certain foreign registrants seeking access to U.S. markets. The SEC indicated that it will (i) require foreign companies to file their registration statements electronically, (ii) actively review all registration statements filed by foreign firms that have business dealings in countries subject to U.S. economic sanctions, (iii) seek information from foreign registrants about any material business they conduct with U.S.-sanctioned countries, and (iv) share information on foreign registrants’ business in sanctioned countries with the Treasury Department’s Office of Foreign assets Control (OFAC). The SEC now believes that "the fact that a foreign company is doing material business with a country, government, or entity on OFAC’s sanctions list is . . . substantially likely to be significant to a reasonable investor’s decision about whether to invest in that company." As a result, the SEC "will seek information from registrants about material business in, or with, countries, governments, or entities with which U.S. companies would be prohibited from doing business under economic sanctions administered by OFAC," and make this information available to the investing public.

The Commission also notes the House of Representatives’ approval last year, by an overwhelming vote of 422-2, of the Sudan Peace Act (H.R. 2052). This legislation would prohibit any entity engaged in the development of oil or gas in Sudan from "raising capital in the United States" or "trading its securities (or depositary receipts with respect to its securities) in any capital market in the United States." This legislation and the SEC guidelines discussed above demonstrate growing recognition by the Congress and Executive Branch that access to the U.S. capital markets by certain foreign registrants, including those of Chinese origin, raises national security concerns.

The Commission acknowledges the important role of the U.S. capital markets as a preeminent source of capital for both domestic and foreign enterprises, and the negative consequences to the U.S. and world economy that could result if access to our markets became unduly restricted. Nonetheless, the Commission believes that access to our capital markets should not be wholly divorced from national security concerns, and that appropriate measures should be put in place to mitigate the potential national security risks arising from the presence of certain Chinese and other foreign registrants in our markets. In egregious cases, denying certain foreign entities access to our markets may be warranted. At a minimum, U.S. investors should be fully informed of the true identities and global activities of foreign registrants that could pose a threat to U.S. security interests. The Commission will continue to examine whether any Chinese companies assisting in proliferation, or engaged in other activities inimical to U.S. security interests (e.g., material dealings with terrorist-sponsoring governments, arms smuggling, technology theft) are raising money in the U.S. capital markets and will report its findings in its public and classified reports, as appropriate.

The U.S. capital markets have become a significant source of capital for Chinese firms. While smaller in scope than the influx in funds from FDI, the U.S. capital markets have provided significant amounts of capital for some of China’s most important SOEs and the Chinese Government itself, and this trend is likely to continue.

This investment dynamic presents the United States with a potential tool of influence and leverage in the U.S.-China economic relationship. The Deutch Commission noted the possibility of using access to the U.S. capital markets as an "economic lever" that could be utilized as part of the U.S. strategy to combat proliferation. This lever could be applied in other circumstances as well, particularly where trade sanctions are contemplated (and may prove to be more effective than trade sanctions).

Critics of capital market sanctions argue that if companies are shut out of the U.S. capital markets for any reason they will simply make their offerings in other markets. However, the Commission believes that this assertion underestimates the global importance of the U.S. capital markets. The market capitalization of the other major capital markets is well below that of the U.S. markets, reflecting the much deeper pool of capital available for securities offerings. As a result, major overseas exchanges may well "max out" over time with regard to their capacity to absorb large-scale offerings if the U.S. markets are unavailable. In addition, a decision by the U.S. Government to deny a Chinese or other foreign firm access to the U.S. capital markets would likely taint that entity’s offerings in other markets, raise its risk profile and cost of funds, and ultimately diminish its value to investors. Finally, a foreign firm’s inability to access the U.S. "demand side" for its debt and equity offerings, including U.S. public pension funds, mutual funds and other large institutional investors, would likely substantially narrow the market for its securities.

The Commission also notes that virtually all the fundraising by Chinese firms in the U.S. capital markets has been conducted by SOEs. China’s nascent private sector firms, which need capital to develop into true competitors of the state sector, have not had the ability to access this source of capital in any meaningful way. U.S. policymakers should consider whether this source of support for Chinese SOEs is counterproductive to U.S. support for the growth and development of a vibrant Chinese private sector.

• The Commission recommends that Congress codify in legislation the disclosure guidelines outlined by the SEC in its May 8, 2001 correspondence to Representative Frank Wolf. These guidelines require the SEC to solicit from foreign registrants and disclose to investors information regarding a foreign registrant’s material business operations in a country, or with an entity, subject to U.S. economic sanctions administered by the Treasury Department’s Office of Foreign assets Control. These guidelines recognize that a foreign registrant’s material business operations in terrorist-sponsoring and other U.S.-sanctioned countries or with sanctioned entities — countries and entities with which U.S. companies cannot do business — pose a material risk to investors.²¹

• The Commission recommends that Congress request the Treasury Department, in coordination with the Executive Branch agencies tasked with identifying and monitoring Chinese and other foreign entities associated with the proliferation of weapons of mass destruction or ballistic missile delivery systems, to assess whether any such entities are accessing, or seeking to access, the U.S. capital markets. If the Treasury Department determines that any such entities are accessing, or seeking to access, the U.S. capital markets, this information should be provided to the SEC and made available to investors including state public pension systems and other institutional investors.

• The Commission recommends that Congress prohibit debt or equity securities offerings in the U.S. capital markets by any Chinese or other foreign entity where the State Department has imposed sanctions on that entity for engaging in the proliferation of weapons of mass destruction or ballistic missile delivery systems.

• The Commission recommends that Congress enhance reporting requirements for Level I ADRs and Rule 144A and Regulation S offerings. None of these types of offerings is now subject to full SEC reporting and registration requirements. As a result, foreign entities can trade their securities in the U.S. markets without the need to disclose detailed htmects of their business operations, including overseas activities that may be harmful to U.S. security interests and pose a material risk to investors.

• Consistent with recommendations in Chapter 1, the Commission recommends that Congress provide additional resources to strengthen the U.S. intelligence community’s collection and analysis concerning the national security dimensions of Chinese and other foreign fundraising in the U.S. capital markets, as well as of Chinese and other foreign entities selling their securities to American investors from exchanges overseas.

• The Commission urges the Treasury Department to follow-up on the recommendation made by the Deutch Commission that the Department lead an interagency review of current and potential mechanisms for exercising financial/economic leverage to combat proliferation, including denying proliferators access to the U.S. capital markets.

Appendix A

BNY = Bank of New York

MGT = J.P. Morgan Chase

CIT = Citibank

ENDNOTES:

1. On October 2, 2001 the Commission published on its website, <http://www.uscc.gov>, a report prepared for the Commission by Adam M. Pener of the William J. Casey Institute of the Center for Security Policy entitled "Capital Markets Transparency and Security: The Nexus Between U.S.-China Security Relations and America’s Capital Markets" [hereafter referred to as the "Casey Institute Report"]. This report provides background on many of the issues relevant to this topic, including a detailed discussion of the controversial U.S. capital market issuances of several foreign registrants, including PetroChina.
2. Enouch Yiu, "Hong Kong seeks role in debt sale," South China Morning Post, 20 November 2001, 1.
3. ADRs are a negotiable security issued by a U.S. depositary bank (e.g., The Bank of New York) that represents the shares of a non-U.S. company which have been purchased by a broker and deposited with a local U.S. custodian bank. There are several types of ADRs, differing in their listing requirements and their ability to raise capital. Level I ADRs are traded in the U.S. over-the-counter (OTC) market and are subject to only minimal Securities and Exchange Commission registration and reporting requirements. Level II ADRs can be listed and traded on U.S. securities exchanges but cannot be used to raise new capital. Level III ADRs can be listed and used to raise capital. Level II and Level III ADRs are subject to more extensive SEC registration and reporting requirements than Level I ADRs. In addition to these three types of ADRs, non-U.S. companies can also tap U.S. investors through Rule 144A and Regulation S offerings. Rule 144A offerings allow non-U.S. companies to raise capital through the private placement of ADRs with sophisticated U.S. institutional investors (referred to as "Qualified Institutional Buyers"). Regulation S offerings allow companies to raise capital by placing depositary receipts offshore to non-U.S. investors, which can then be marketed to U.S. investors following a waiting period. Neither Rule 144A nor Regulation S offerings are subject to full SEC registration requirements.
4. Bank of New York ADR directory can be found at www.bankofny.com.
5. US- China Security Review Commission, Hearing on China’s Capital Requirements and U.S. Capital Markets, Written Testimony of Marc E. Lackritz, 6 December 2001, 5.
6. Ibid.
7. US- China Security Review Commission, Hearing on China’s Capital Requirements and U.S. Capital Markets, Written Testimony of Paul S. Wolansky, 6 December 2001, 4.
8. Gordon G. Chang, China’s Capital Needs, Report prepared for the US-China Security Review Commission, 8 May 2002, Chap. 3, p.3.
9. The figures cited for funds raised through IPOs on the NYSE are based on data compiled for the Commission by Gordon Chang. Ibid., Appendix 4.
10. The Iran and Libya Sanctions Act of 1996 (ILSA), Public Law 104-172, 104th Cong., 2d Sess., 5 August 1996, sanctions foreign companies that provide new investments over $40 million for the development of petroleum resources in Iran or Libya.
11. Joe Leahy, "Companies and Markets- HK bank set to delay US part of IPO," Financial Times, 16 April 2002, 17.
12. Eric Ng, "Market Flocks to CNOOC Bond," South China Morning Post, 2 March 2002, p. 3.
13. Ibid.
14. US- China Security Review Commission, Hearing on China’s Capital Requirements and U.S. Capital Markets, Written Testimony of Senator Fred Thompson, 6 December 2001.
15. Casey Institute Report, 19-23.
16. Select Committee of the U.S. House of Representatives, Report of the Committee on U.S. National Security and Military/Commercial Concerns with the People’s Republic of China (Washington, D.C.: Government Printing Office, 1999) Volume. 1, Chapter 1, 57.
17. Commission to Assess the Organization of the Federal Government to Combat the Proliferation of Weapons of Mass Destruction, Combating Proliferation of Weapons of Mass Destruction, (1999), 78 [hereafter referred to as the Deutch Commission Report].
18. Deutch Commission Report, 77-78.
19. Tai Ming Cheung, "Can PLA Inc. be Tamed?," Institutional Investor, July 1996, 47.
20. "Flagship Aviation Company takes up Historic IPO Mission," Business Weekly, 25 June 2002.
21. The Commission made this recommendation in a letter dated March 15, 2002 to the Chairman and Ranking Members of the Senate Banking, Housing and Urban Affairs Committee and House Financial Services Committee, with copies to the Senate and House leadership. The text of this correspondence can be obtained on the Commission’s website <http://www.uscc.gov/>.
The Secretary of State has designated these countries as state