U.S-CHINA COMMISSION PUBLIC HEARING

DECEMBER 6, 2001

CHINA’S CAPITAL REQUIREMENTS AND U.S. CAPITAL MARKETSPresented before the U.S. China Economic and Security Review Commission

Senator Fred Thompson
December 6, 2001

I would like to thank the Commission for inviting me here today to speak on the important and timely subject of China and our capital markets. As you know, I have long advocated increased monitoring and limiting access to U.S. capital markets of companies doing business with entities that have links to proliferation. I believe that the fight against terrorism and our increased need to enhance homeland security make this issue that much more important. One of the things that we have learned about terrorist organizations like Al Qaeda is that they have used the United States financial markets to provide funding for their terrorist activities. It is possible, even likely, that Americans may have unknowingly provided financial support to the very terrorist organizations that attacked our nation on September 11th. The same is undoubtedly true with respect to organizations that are proliferating weapons of mass destruction.

We have known about the problems that our failure to scrutinize the national security implications of allowing certain companies to raise money in our capital markets has created for many years. Congressionally mandated commissions studying the issue of proliferation have concluded both that the Chinese government is using the U.S. capital markets to fund its proliferation activities and that the U.S. needs to address this issue as part of a solution to proliferation. The Cox Commission review of U.S. national security concerns with China concluded that “increasingly, the PRC is using U.S. capital markets as a source of central government funding for military and commercial development and as a means of cloaking technology acquisition by its front companies.”

The Deutch Commission study of the threat posed by proliferation stated that “the Commission is concerned that known proliferators may be raising funds in the U.S. capital markets.” The Commission also noted that most American investors don’t know that they are contributing to the proliferation threat, saying, “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.”

It is extremely disturbing to think that we are financing China’s military development and the proliferation of weapons of mass destruction to rogue nations. But plenty of evidence exists that we are directly investing in companies and programs that may one day be the agents of our own destruction. The California Public Employees’ Retirement System (or Calpers) has invested millions of dollars of employee pension funds in companies with close ties to the Chinese government and the Chinese People’s Liberation Army. Calpers has invested in four companies linked to the Chinese military or Chinese espionage: Cosco Pacific, China Resources Enterprise, Citic Pacific, and Citic Ka Wah Bank. The Teachers’ Retirement System of Texas was also invested in Cosco Pacific, but it divested its shares of Cosco Pacific less than a month after receiving a congressional letter discussing Cosco’s links to the Chinese military.

The case of the Texas Teachers divestment of its Cosco stock demonstrates one element that must be part of the solution to this problem, and that is increased transparency. I believe that most Americans would not want their dollars going to organizations that have either direct or indirect links to the proliferation of weapons of mass destruction. We must provide a mechanism for them to get that information. Right now, there are no requirements for national security reviews and no requirements for companies to provide this information in order to list on our stock exchanges. Earlier this year, Laura Unger, then the Acting Chairman of the Securities and Exchange Commission (SEC), announced important new steps that would provide increased transparency for American investors. These steps included requiring any foreign country that is doing “material business” with a country sanctioned by the United States to provide information on its dealings with countries, governments, or entities with which U.S. companies would be prohibited from doing business. She also indicated that the staff of the Division of Corporation Finance would attempt to review all registration statements filed by foreign companies which reflect material business dealings with governments or countries subject to U.S. sanctions. In addition, she indicated that the SEC would initiate a proposed rulemaking that would require all foreign companies to file registration statements electronically. I have written a letter to SEC Chairman Pitt urging him to continue these initiatives. I believe they will provide important transparency for U.S. investors.

But I think that there is also a role for limiting access to U.S. markets. I do not believe that transparency is enough in all cases. I think that the President’s approach to terrorism can provide a model here. In the wake of the September 11th attacks, the President made a decision to attack terrorism on all fronts, including the financial front. On September 24th, the President issued an executive order to freeze the assets and block the U.S. transactions of terrorists, those who support them, and foreign banks that refuse to cooperate in our efforts. The President has cast a wide net, saying that we must take action not only against terrorists, but against those who harbor and support them, and possibly even against those financial institutions that refuse to support our efforts. The President’s action blocks any U.S. transactions of any person or institution associated with terrorists or terrorist organizations. I believe that we must take the same approach against proliferators. There is a role for denying access to our financial markets to entities that we know have engaged in the proliferation of weapons of mass destruction. I urge this Commission to consider ways to apply the President’s actions to cut off financial resources to terrorists to proliferators as well. I believe that proliferation poses as great a threat to our security as terrorism, and that we must attack the problem of proliferation and those who engage in it with the same determination that we are rooting out terrorists and denying them the resources they need to conduct their activities.