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U.S.-China Economic and Security Review Commission, "Hearing: China and the Capital Markets," August 11, 2005

This hearing was conducted by the U.S.-China Economic and Security Review Commission on August 11, 2005. The U.S.-China Economic and Security Review Commission was created by the U.S. Congress in 2000 to monitor, investigate, and submit to Congress an annual report on the national security implications of the economic relationship between the United States and the People’s Republic of China.
August 11, 2005

August 11, 2005
124 Dirksen Senate Office Building
1 st Street and Constitution Avenue, NE
Washington, DC

Co-chairs: Vice Chairman Roger W. Robinson, Jr. and Commissioner Michael R. Wessel


The hearing will come to order. Today, the U.S.-China Economic and Security Review Commission will have a hearing on China’s Strategy and Objectives in the Global Capital Markets. I’d like to thank Commissioner Mike Wessel to my right and Vice Chairman Roger Robinson for chairing this hearing and for continuing to focus the Commission’s attention on the important topic before us. I also thank today’s panelists in advance, for offering their informed perspectives on the issues.

The economic and security challenges for the United States, and particularly from our point of view American investors and holders of mutual funds on China stocks and bonds—firefighters, policemen, teachers, workers—the challenges for the United States and our constituents stemming from the increased incursion of Chinese firms to the global capital market is certainly one of the most unique issues of our mandate from the Congress, and this—to repeat our mandate, Part D of the congressional mandate for this Commission—is that we shall evaluate the extent of Chinese access to and use of United States capital markets, whether the existing disclosure and transparency rules are adequate to identify Chinese companies which are active in United States markets.

These issues have significant implications for U.S. institutional and portfolio investors looking to purchase stock in Chinese firms, as well as financial analysts tasked with unraveling Chinese companies’ complex web of relationships and finances.

As Chinese financial institutions prepare today, we understand, for an estimated combined $15 billion in listings, questions need to be raised regarding the loan portfolios of these institutions. I am concerned that U.S. investors may not have sufficient information to make informed decisions about the risk of these investments.

Furthermore, the possible links between listed state-run firms and banks and China’s military industrial complex also requires comprehensive examination.

I might point out—and we’ll be talking about this during the hearing—that Wall Street financial ratings for Chinese banks, for 13 Chinese banks, which we have seen, give us some pause as to the intrinsic strength of those banks. None of those banks rise to even average international standards, and we’ll be talking about that during the day today.

China’s state-run enterprises and financial institutions are not transparent or accountable, making it nearly impossible to know the full extent of their assets and subsidiaries. Now that Congress has enacted comprehensive enhanced disclosure framework known as the Sarbanes-Oxley law, Chinese firms apparently have been by-passing the New York Stock Exchange and listing mainly in Hong Kong, London or Frankfurt.

Given the rush of Chinese IPOs, particularly to the Hong Kong Stock Exchange, the Hong Kong Stock Exchange financial authorities would be wise to recognize the potential consequences of allowing Beijing-managed firms to acquire so much capital under their auspices, and there is some concern that these institutions are going to Hong Kong Stock Exchange with the lower regulation and standards as a way to bypass Sarbanes-Oxley. That’s something that we need to discuss.

Taken together, all this suggests that China’s need to finance its economic expansion and support its state-owned enterprises with U.S. investors’ money demands the full attention of the United States Government. I’d like to turn the podium over now to the Co-chairman, Commissioner Mike Wessel, and then to my Vice Chairman Roger Robinson.

Commissioner Wessel.


Thank you, Chairman D’Amato, and thank you Vice Chairman Robinson not only for cochairing today’s hearing but your leadership on this issue since the Commission’s inception several years ago. It’s your leadership that has helped raise real public attention on this issue, and it’s appreciated by us and by many others.

Since the Commission’s last report in 2004, we’ve held ten hearings covering a range of topics on U.S.-China trade and security issues. Today’s topic helps complete this picture of U.S.-China economic relations with the discussion of a topic that gets relatively little attention: the growing trend of Chinese firms raising capital in U.S. and global markets.

While it is certainly an appropriate step in China’s economic development that its firms are now increasingly looking to global capital markets to raise funds, it is also appropriate for U.S. Government and the U.S. investors to want to better understand the nature of these listings.

This Commission has made clear in the past its concern about the lack of transparency of certain Chinese firms listing in the global capital markets. We’ve asked whether U.S. investors are sufficiently aware of the financial wherewithal of such firms and whether the U.S. Government is sufficiently aware of any military and weapons proliferation ties these firms may have as well as their impact on other vital security interests of the United States.

With regard to transparency, as the Chairman noted just a moment ago, current U.S. securities laws such as Sarbanes-Oxley appear to have decreased the number of Chinese offerings in the U.S. capital markets due to concerns by the firms about the enhanced disclosure requirements for foreign registrants.

Today, we will discuss how this legislation has caused Chinese companies to list in Hong Kong or Tokyo rather than the United States.

Transparency concerns may be heightened with regard to the anticipated listings of major Chinese state-owned banks in the U.S. capital markets. I believe we need to draw attention to the level of due diligence performed by these banks and gain a handle on the true holdings in their loan portfolios.

Are they major sources of capital for Chinese military and defense firms? Moreover, Chinese state-owned banks have been the traditional sources of below market rate capital for China’s state-owned industries serving, in my opinion, as a massive form of state subsidy unavailable to U.S. competitors.

Take, for example, the recent CNOOC bid for Unocal. To exceed Chevron’s offer for Unocal, CNOOC received six billion in state-owned bank funding in addition to the seven billion in loans at below market or no interest rates from its state-owned parent company.

Deals such as this highlight how the nature of state-owned bank lending practices may be based more on governmental interests than true market forces.

As these banks list publicly, this behavior needs to be monitored and at the very least investors deserve complete disclosure of the non-market forces at work.

The forces that drove Congress to enact Sarbanes-Oxley are no less important here as we look at how to protect the investing public.

Our intention is not to propose unreasonable restrictions on the access of Chinese firms to U.S. capital markets. Our goal instead is to ensure that the U.S. Government and U.S. investors have the most complete information possible on the financial standing and activities of Chinese firms listing in our capital markets. The proper functioning of our capital markets requires broad transparency of the listed entities. We should hold all listings to this important standard.

Thank you.

Opening statement of Chairman Richard D'Amato
Opening statement of Vice Chairman Roger W. Robinson, Jr.
Opening Statement by Hearing Co-Chair Michael R. Wessel

Panel I: Analyzing Chinese IPOs: The Listing Process
Michael Geczi , Managing Director, The Torrenzano Group
Robert G. DeLaMater, Partner, Sullivan & Cromwell LLP

Panel II: Upcoming Chinese Bank Listings and the Banking Sector
Pieter Bottelier, Professor, Johns Hopkins University (SAIS)
Marshall W. Meyer, Richard A. Sapp Professor of Management and Sociology, Wharton School of Business, University of Pennsylvania

Panel III: China’s Strategy in International Capital Markets and Implications for the U.S.
Solomon Tadesse, Assistant Professor, University of South Carolina
Don Straszheim, President and CEO, Straszheim Global Investors, [former chief economist for Merrill Lynch]
Frank Gaffney, President, The Center for Security Policy
Howard Chao, Partner in Charge, O'Melveny & Myer



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