U.S.-China Economic and Security Review Commission, "Hearing: Chinese Fundraising Activities in U.S. Capital Markets," December 6, 2001

December 6, 2001
Room 124, Dirksen Senate Office Building
1st & Constitution Avenue, NE
Washington, DC

PREPARED STATEMENT OF CHAIRMAN C. RICHARD D’AMATO

Today the Commission will hold its first hearing examining China’s growing capital requirements and the role of the U.S. capital markets in addressing these needs.

The Commission was created by Congress to take a comprehensive look at our economic relationship with China and the implications of this relationship on U.S. national security interests. Part of the Commission mandate directs us to look at ‘‘the effects, if any, on the national security interests of the United States of the use by the People’s Republic of China of financial transactions and capital flow and currency manipulations.’’ As we will hear today, China has significant long-term capital requirements that will need to be addressed in the coming years. To date, China has raised significant capital to meet these needs through debt and equity offerings in the U.S. capital markets, and this trend may continue in the future. It is important that the Commission study the implications of this activity and how it fits into the overall U.S.-China relationship. In addition, Chinese companies raising money in the U.S. capital markets may raise more direct security concerns to the extent they are connected to China’s military-industrial complex.

Tomorrow, the Commission will hold a hearing on Chinese budget issues and the role of the People’s Liberation Army in the economy. Together, our two hearings this week will help move the Commission forward in its examination of the security implications of the U.S.-China economic relationship.

We have a distinguished group of panelists today that should provide the Commission with broad perspectives on the capital market issues at hand. I am particularly honored that Senator Fred Thompson will be kicking off today’s hearing. Senator Thompson has been a leader in the Congress in calling for a closer examination of U.S.-China economic relations. Of particular relevance to today’s hearing, he sponsored legislation last year that would have authorized the President to bar Chinese and other companies found to be involved in weapons proliferation from the U.S. capital markets and would have required that the Securities and Exchange Commission (SEC) be notified of, and disclose to investors, information about a company’s proliferation activities. More recently, he tasked the General Accounting Office (GAO) with investigating Chinese companies’ activities in the U.S. capital markets. The Commission looks forward to Senator Thompson’s insights into the potential interconnection between China’s involvement in the U.S. capital markets and national security.

ollowing Senator Thompson’s opening remarks, I will turn the gavel over to today’s hearing co-chairs, Commissioners Robinson and Wessel. Commissioner Robinson will chair the morning sessions of the hearing, with Commissioner Wessel chairing the afternoon panels.

Before we begin, I would also like to note that earlier in the year we commissioned a report from Adam Pener, Senior Analyst at 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.’’ The report is posted on our website at ww.uscc.gov. The report included a series of recommended actions that could be undertaken by the Commission and the federal government. These recommendations were not included in the version of the report posted on our website and have not been endorsed by the Commission. Nonetheless, I believe they serve as worthwhile discussion points and therefore we have forwarded them to the participants on today’s panels and will place copies for public distribution on the table in the back of the room.

I look forward to the testimony in what should be an enlightening hearing.

PREPARED STATEMENT OF CO-CHAIRMAN ROGER W. ROBINSON, JR.

Thank you, Mr. Chairman.

I am pleased to be co-chairing today’s hearing on China’s capital requirements and U.S. capital markets, an aspect of the U.S.-China relationship that I believe is vitally important to our Commission mandate.

To begin, I would like to add my thanks to Sen. Thompson for his participation in today’s hearing. He has been a leading voice in the Congress on the capital markets issues before the Commission today, as well as on Chinese proliferation of weapons of mass destruction and related security issues. His presence here today underscores the importance of this emerging portfolio of issues to America’s national security as well as to the ‘‘due diligence’’ assessments, investment policies and corporate governance of market players and participants.

China is establishing an ever-more important presence in the U.S. capital markets, raising multi-billion dollar sums through both debt and equity offerings. The importance of the U.S. capital markets as a source of capital to finance China’s economic growth as well as the nature of the Chinese entities listing on U.S. markets are important subjects for this Commission’s deliberations. Our Commission needs to continue to assess the national security implications of China’s fund-raising in the U.S. capital markets, whether proper, disclosure-oriented regulations are in place to monitor this activity, and whether U.S. investors are adequately informed about the identity of Chinese companies in our markets and the nature of their overseas operations (as well as those of their parent and subsidiary companies).

Today’s distinguished gathering marks the first time that the Congress—either directly or through a Congressional commission—has held a public hearing to examine the important nexus between U.S. capital markets and national security.

Our hearing today will present various perspectives on this 21st century issue area. During the morning session, which I will chair, the Commission will be provided an overview of China’s long-term capital needs and the role the U.S. debt and equity markets have played—and are likely to play in the future—in addressing these needs. On this panel are four distinguished experts: Professor Warren Bailey of Cornell University, Dr. Nicholas Lardy of The Brookings Institution, Thomas Byrne, a Vice President and Senior Analyst on China from Moody’s, and Stephen Harner, a financial consultant from Shanghai with extensive government and banking experience in both China and Japan. James Dorn, a scholar from the Cato Institute, will also address the issues being discussed by this group, but will appear on the final panel this afternoon.

During the afternoon session, which will be chaired by my esteemed colleague Commissioner Wessel, the Commission will hear from the Wall Street community, organized labor and representatives of large pension funds. Their testimony will help provide the Commission with the perspectives of those who bring Chinese debt and equity offerings to the U.S. markets as well as those who may invest in them.

Regrettably, the Commission will not hear from a representative of the U.S. Treasury Department, the Securities and Exchange Commission (SEC), or the Department of State. The Commission extended an invitation to these agencies in the hope of gaining the benefit of their views on the current regulatory requirements applicable to foreign registrants in the U.S. capital markets as well as the extent to which the United States Government is monitoring foreign registrant activity for possible national security abuses and concerns. The Commission was privileged to discuss these issues in a closed session with Treasury Undersecretary John Taylor in October. The Commission plans to continue its dialogue with Treasury, State, and the SEC and will submit questions to the SEC and the other agencies as deemed appropriate.

Opening Remarks by Senator Fred Thompson

Panel 1 - Overview -- U.S. Capital Markets/China’s Capital Requirements
Prof. Warren Bailey, Johnson Graduate School of Management, Cornell University
Dr. Nicholas Lardy, Senior Fellow, Brookings Institution
Thomas Byrne, Vice President, Moody’s Investors Service
Stephen Harner, President, S.M. Harner and Co. (Shanghai)

Panel 2 - Market Participants and Underwriters
Paul Wolansky, Managing Director, New China Management Corp.
Robert D. Hormats, Vice Chairman, Goldman Sachs
Marc E. Lackritz, President, Securities Industry Association

Panel 3 - Investors and Risk Assessment
James A. Dorn, Vice President for Academic Affairs, Cato Institute
William Patterson, Director, Office of Investment, AFL-CIO
Michael Flaherman, Chair of Investment Committee, Cal. Public Employees’ Retirement System
Rep. Steven R. Nickol, Pennsylvania House of Representatives