-Caveat Lector-
Published 12/13/99
Financing China�s
Red Army
By James Hackett
Beijing is using U.S. capital markets to
finance its military modernization. Rep.
Chris Cox has said Americans who buy
Chinese securities without adequate
disclosure �are essentially lending money
to the communist government of China.�
The spotlight on the World Trade Organization
and the eagerness of the Beijing government to
join it brings to mind another kind of trade with
communist China � the sale of stocks and
bonds in Chinese government-owned
companies for U.S. dollars. Roger Robinson,
a member of the National Security Council
staff in the Reagan administration who now
chairs the William J. Casey Institute of the
Center for Security Policy, has warned for
years of the need for disclosure in such
transactions.
Then the Cox report, issued last May by a
committee headed by Rep. Chris Cox,
California Republican, on China�s military and
commercial activities, noted Beijing�s use of
U.S. capital markets to finance its military
modernization. Mr. Cox said Americans who
buy Chinese securities without adequate
disclosure �are essentially lending money to
the communist government of China.�
China is creating a modern military machine
with the goal of projecting enough force to
make Taiwan join the mainland on its terms,
and if necessary to invade Taiwan while
holding the United States at bay. Beijing is
buying modern military equipment from
Russia, including SU-27 and SU-30 fighter
aircraft, Kilo submarines, air-to-air missiles,
and other advanced weaponry. Add the
domestic production of new aircraft, naval
units, and medium-range ballistic missiles, and
Beijing is acquiring weapons needed to attack
Taiwan. But China also is producing advanced
cruise missiles to threaten the U.S. Pacific
Fleet and new intercontinental ballistic missiles
that hold American cities at risk. Last year,
China raised defense spending 15 percent, the
11th year in a row of double-digit increases.
One source of hard currency for weapons
purchases is the sale of stocks and bonds for
dollars. John Berlau, writing in Investor�s
Business Daily on July 27 and Sept. 7,
revealed how the California Public Employees
Retirement System (CalPERS) invested
millions in Chinese companies with alleged ties
to military or intelligence services. One is
China International Trust and Investment
Corp. (CITIC), which the Rand Corp. calls �a
conduit for military sales and acquisition.�
Another is Cosco Pacific, one of whose ships
was seized by U.S. customs in 1996 for trying
to smuggle 2,000 automatic weapons into the
port of Oakland.
Other Chinese companies with U.S. dollar
investments include China Resources, cited by
Sen. Fred Thompson as �an agent of
espionage � economic, military, and political
� for China.� Investor�s Business Daily
reported that the Texas Teachers Retirement
System and the Tennessee state pension fund
also hold stock in this alleged front for
Chinese military intelligence. Another
company, China North Industries Group
(NORINCO), reportedly is �a significant part
of China�s Military apparatus.� Poly
Technologies, whose chairman also is
chairman of CITIC, is said to be owned by the
People�s Liberation Army and acts as a
conduit for Russian arms sales to China.
Three state-owned banks, the Bank of
China, China Construction Bank, and China
Development Bank, have raised some $3.8
billion in bond offerings in U.S. dollars. It was
the Bank of China that allegedly was used to
transfer funds to Johnny Chun and Charlie Trie
in the 1996 Democratic campaign finance
scandal. Overall, Chinese entities have issued
more than $14 billion in bonds for U.S.
dollars, $800 million by CITIC alone, in most
cases without adequate disclosure about the
borrowers, their management, or affiliates and
subsidiaries � much less their ties to the
Chinese leadership.
Last July, the Deutch Commission, chaired
by President Clinton�s former CIA Director
John Deutch, reviewed the government�s
ability to limit the proliferation of weapons of
mass destruction and expressed concern that
�known proliferators may be raising funds in
U.S. capital markets.� The commission noted
that without a national security review of
foreign companies that sell stocks and bonds
for dollars, U.S. investors do not know how
their money is used.
Most Chinese companies sell stock on the
Hong Kong market, but at least 27 are listed on
the New York Stock Exchange. In September,
the Dow Jones Report revealed that China
National Petroleum, a government-owned
enterprise with some $1.4 billion invested in
Iraq and more than $1.5 billion in Sudan, a
state-sponsor of terrorism, is planning an initial
public offering on the New York Stock
Exchange to raise $5 billion to $10 billion.
In an effort to bring these investments
under prudent scrutiny, Rep. Spencer Bachus,
Alabama Republican, chairman of the
monetary policy subcommittee of the House
Banking Committee, and Rep. Dennis
Kucinich, Ohio Democrat, proposed The U.S.
Market Security Act of 1999. This bill would
establish an Office of National Security at the
Securities and Exchange Commission to report
to Congress the names of foreign government
affiliates seeking to enter the U.S. stock and
bond markets. The sponsors emphasize they
are taking great care not to impede the free
flow of capital. Their goal: to improve
transparency so Americans will know more
about the foreign organizations in which they
are investing.
Portfolio managers are investing the
pension funds of Americans in companies
controlled by the Chinese government and in
some cases the Chinese army without
sufficient disclosure of their true owners or
activities. How much ultimately is going to
support China�s militarization? No one knows,
but greater disclosure is needed. Congress
should take up and enact the U.S. Market
Security Act early in the next session.
James T. Hackett is a contributing writer to
The Washington Times based in San Diego.
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