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U.S.-China Economic and Security Review Commission, “Corporate Accountability, Access to Credit, and Access to Markets in China’s Financial System – The Rules and Their Ramifications for U.S. Investors,” March 7, 2013
Thursday, March 7th, 2013
Dirksen Senate Office Building,
Room 562 1st Street SE,
Washington DC 20515
OPENING STATEMENT OF COMMISSIONER ROBIN CLEVELAND, HEARING CO-CHAIR
HEARING CO-CHAIR CLEVELAND: Good morning and welcome to our hearing on "Corporate Accountability, Access to Credit, and Markets in China's Financial System and the Rules and Ramifications for U.S. Investors."
In 2006, three of the four largest Chinese banks launched IPOs. Selling off a 10.5 percent stake in its business, the Bank of China issued over 25 billion shares raising $9.7 billion, ranking eighth in U.S. IPO history. This record level was invested despite corporate documents disclosing 75 cases of fraud and over $150 million in criminal conduct charges by employees.
Ranking first and second in the largest IPOs in U.S. history are the Agricultural Bank of China, yielding a whopping $19.2 billion, and the Industrial and Commercial Bank close on its heels with $19.1 billion. These numbers are staggering to me, especially when compared to other top IPOs. Visa, for example, which raised $16 billion, did so after 31 years as a proven
Not all offerings are on this scale, but whatever the size, Chinese expansion into U.S. capital markets presents both opportunities and risks for companies and investors alike. There is substantial opportunity in the twin pledges made by the Chinese leadership to improve the transparency, governance and functioning of capital markets and to expand access for
foreign financial service firms with the knowledge, expertise and products to improve productivity and growth.
If, and it is a big if, these commitments are implemented, they not only will protect American shareholders and investments in China but will also support essential rebalancing of the Chinese economy, strengthening
consumer demand and access to reliable returns.
On the other hand, if the status quo is maintained, the risks are significant. Failure to move forward on standards of governance and accountability, continued misallocation of resources to protect state -owned enterprises and banks, and secretive mishandling of non-performing loans will compromise China's economic potential sooner rather than later.
Accounting scandals and fraud already have prompted U.S. regulators to delist dozens of Chinese companies with many others losing substantial market value. 64 of 154 Chinese companies listed last year are trading well below their initial price.
Confidence in security market transitions depends on a reliable transnational audit regime--an agreement which continues to elude the Securities and Exchange Commission, the Public Company Accountability Oversight Board, and the China Securities Regulatory Commission.
While it may be understandable, I view it as unfortunate that the SEC recently chose to take legal action against U.S. auditors' inability to release working papers. A resolution is in all parties' interests, and I hope options for the path ahead are offered by our witnesses today.
While Mr. Walter has noted capital begins and ends with the big four banks which control over $16 trillion in assets, the future of growth may depend on the access China's 42 million small and medium private enterprises have to capital.
In her testimony, Ms. Prasso observes that SMEs contribute 60 percent of GDP and 80 percent of urban employment, yet rely on an unregulated, albeit legal, shadow banking system, which includes investments in trusts and wealth management products that sound an awful lot like CDOs.
I welcome our witnesses' observations on domestic lending procedures and priorities and problems. A pilot SME lending program in Wenzhou seems promising but so too would accelerating and expanding U.S. financial services firms' access and impact on the market.
By the end of the day, I hope we will have a full picture of U.S. access to Chinese financial markets, the banking, equity, and financing resources available to Chinese firms, as well as the rules and governance mechanisms which assure accountability and protect the American investor.
Panel II: China’s Banking System and Access to Credit
Regina Abrami, Lauder Institute for Management and International Studies
Lynette Ong, University of Toronto
Carl Walter, formerly of JP Morgan China
Sheridan Prasso, Bloomberg News
Panel III: Market Conditions and Access Issues for Banking, Investment, Insurance and other Services Firms
John Dearie, Financial Services Forum
Paul Saulski, Georgetown University
Steve Simchak, American Insurance Association