Senate’s Approval of P.N.T.R. Sets the Stage for China to Renew its Penetration of the U.S. Bond Market
(Washington, D.C.): According to a September 16 Reuters report, the government of China
intends to reenter the U.S. bond market in the November time-frame with a sovereign bond
offering valued, at minimum, at $1 billion. If, as expected, the offering — which will be
underwritten by Goldman Sachs, JP Morgan and Morgan Stanley Dean Witter — becomes
oversubscribed, the proceeds may be closer to $2-plus billion.
The timing could be described as “No accident, Comrade.” Beijing clearly hopes to capitalize
on
the perception that — in the wake of the U.S. Senate’s failure to attach conditions to the
Permanent Normal Trade Relations (PNTR) legislation concerning the PRC’s appalling human
rights, religious freedom and proliferation records — in the name of “engagement,” anything
goes.
China Goes for the Gold
The Chinese Communists appear especially anxious to reestablish their ability to have
unfettered,
undisciplined access to the U.S. capital markets. The opportunities thus afforded to garner vast
quantities of funds with which the leadership can do as it wishes, figure prominently in Beijing’s
economic and strategic planning. To date, the Chinese government has issued an estimated $4.2
billion in dollar-denominated bonds primarily to U.S. investors, the most recent being a
Goldman-led offering that generated $1 billion in December 1998 for the government of the
PRC.
By using the PNTR vote — and the tabling of the Thompson-Toricelli amendment — to
slipstream
a huge sovereign bond offering, China evidently thinks that it can avoid any repetition of the
difficulties encountered with its recent multi-billion dollar foray on Wall Street: the largely
unsuccessful China National Petroleum Company/PetroChina IPO in April (which was reduced
by over 71% from its original target amount of $10 billion, primarily due to massive bipartisan
political opposition from influential, non-governmental organizations).
also expects thereby to clear the way for a number of impending initial public offerings in New
York by such state-owned dinosaurs as China National Offshore Oil Corp., China PetroChemical
Corp. and Shanghai BaoSteel.
China may have miscalculated, however, by announcing that this bond offering will come to
market within days of the U.S. presidential election. After all, that timing may just
enable
those, like the PetroChina Coalition, who are profoundly concerned about U.S. policy
toward China to transform this sovereign debt issue, in effect, into a grassroots referendum
on that policy.
The Trouble With Undisciplined Sovereign Bonds
This possibility is heightened by the very nature of China’s latest foray into the U.S. capital
markets. Sovereign bond offerings are synonymous with general-purpose lending to foreign
governments. That is because they are not tied to underlying projects, trade transactions or other
specific uses of funds.
Financial Problems
From the 1970’s onward, this type of undisciplined, unconditioned lending to governments
has
proven to be not just bad policy, but bad banking, as well. Specifically, lenders and investors
have no idea where their money is going or how it is being used. In addition, the absence of
export-generating or import-substituting projects means that there is no identifiable, new
cash-flow earmarked for the ultimate repayment of the bond.
There are a number of ways that these types of credits can go wrong for U.S. investors and/or
American taxpayers. For instance, the latter can end up bailing out private creditors in the event
that a foreign government is deemed “too important to fail” (e.g., the Soviet Union, Mexico,
Russia, various governments involved in the Asian financial crisis in 1997-98, etc.).
There is also ample precedent for sovereign borrowers with centrally-controlled economies
(which is still the case for much of China’s GDP) to misallocate resources — thanks to the
absence of genuine, systemic market conditions — and then be forced to engage in repeated debt
reschedulings, and even forgiveness schemes, at Western taxpayer expense.
Political Risks
On the political front, the problems with general-purpose sovereign bond offerings are even
more
onerous. When the Communist government in Beijing receives what amounts to a “blank check”
to employ $1 billion-plus at its sole discretion, many investors’ non-financial
interests can be
adversely affected. For example, the PRC may employ the funding to:
- accelerate its acquisition of mobile ICBM’s capable of targeting American cities;
- fund supplier credits for the proliferation of weapons of mass destruction and ballistic
missile
delivery systems;
- help underwrite Beijing’s robust non-nuclear military buildup;
- subsidize genocidal and terrorist-sponsoring activities and their perpetrators in places like
the
Sudan, where China has major energy and geopolitical interests;
- enable intensified religious persecution, human rights abuses, the incarceration of political
prisoners, forced abortions, etc.
- perpetuate forced and child labor and massive layoffs from state-owned enterprises without
fair compensation;
- pursue energy and other projects on or near the Tibetan Plateau, which threaten the identity,
autonomy and natural resources of the Tibetan people; and
- despoil the environment via projects like the Three Gorges Dam.
The Bottom Line
China’s impending sovereign bond offering represents a new form of 21st century “moral
hazard”: Americans who care deeply about some or all of the aforementioned concerns could
easily end up lending their personal investment dollars to China, perhaps unwittingly through a
variety of different investment venues (e.g., insurance portfolios, corporate retirement plans,
“emerging market growth funds,” public pension plans, mutual funds, etc.).
Unfortunately, it is predictable that, all other things being equal, these serious, principled
concerns — to say nothing of the associated down-side financial and political risks — will go
largely unmentioned in the marketing “road show” Goldman and others will be undertaking
shortly on behalf of their Chinese client.
In order to ensure that American investors are fully informed about the
strategic and political, as
well as financial, implications of this latest bond offering, the William J. Casey Institute
will
be monitoring — and actively opposing — this ill-advised, undisciplined and
potentially quite
dangerous loan directly to the government of the People’s Republic of China.
– 30 –
1. See Casey Institute Publications: Fed Chairman
Greenspan Takes Aim at Use of Capital
Markets Leverage to Protect U.S. Security Interests — and Misses (
Financial Time Affirms ‘Legs’ of Casey Institute’s Capital Markets Transparency
Initiative;
Underscores Market-Moving Power of PetroChina Coalition (
Pivotal Role in PetroChina’s I.P.O. — And Market’s Bleak View of
Chinese State-Owned Enterprises (00-R 36, 13
April 2000); Prudential Securities’ Melcher
Breaks The Code On The Long- Term Market Implications of PetroChina
Controversy (00-C
30, 30 March 2000); Respected Far Eastern
Economic Review Captures Broader Message to
the Markets Embodied in PetroChina’s IPO Fiasco (00-F
23, 31 March 2000); Senior
Legislators Press S.E.C.’s Levitt on PetroChina IPO — Missives from Reps. Oxley and Baucus
Should be Wake-Up Call to S.E.C, U.S. Investors (00-F
17 , 17 March 2000); Casey’s Robinson
Testifies Before California Legislature on Prospect of Global “Bad Actors” Penetrating State
Portfolios (00-R 4, 14 January 2000).
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