You, too, may be funding China’s army

By Peter Schweizer
USA Today , 14 May 1997

Believe it or not, your pension fund
could be financing the military
establishment of a potential enemy and
investing in an unstable government that
might not honor its obligations.

The Chinese People’s Liberation Army
(PLA) is using a speedy route to raise
cash: issue bonds in the United States.

Roger Robinson, a former vice
president at Chase Manhattan Bank, has
uncovered more than $ 6 billion in bonds
offered to investors in recent years.
These have been issued by Chinese
government banks and state-owned
enterprises which, in many instances, are
closely connected to the PLA and the
Chinese military-industrial complex.

These bond sales pose a very real
national security problem and could
severely undermine the health of any
pension funds that invest in them.

The Chinese banks include the Bank of
China, China Investment Bank and China
International Trust and Investment Corp.
(CITIC). According to Defense
Intelligence Agency analyst Nicholas
Eftiamiades, financial institutions such
as these are used by Chinese intelligence
to fund operations and/ or serve as a
cover for operatives.

These banks also could provide
financing for Chinese arms sales to
developing countries.

Consider the case of CITIC, which is
actually run by the general staff of
China’s Military Commission. Chairman
Wang Jun is notorious for his attempt to
smuggle $ 4 million worth of AK-47s to
sell to California street gangs. His
father, Gen. Wang Zheng, was a leader of
the hard-line faction that ordered the
massacre at Tiananmen Square. So far,
CITIC has issued about 15 bonds in the
securities market, most recently for
around $ 800 million.

The U.S. Treasury Department does not
restrict these activities — even if they
concern national security. Only nations
subject to embargo or trade sanctions
(for example, Iran, Iraq and Libya) face
government restrictions on issuing bonds.

Treasury Secretary Robert Rubin’s
former firm was lead manager for one of
CITIC’s $ 250 million bond offerings.
Long-established firms such as Goldman
Sachs and J.P. Morgan have been all too
willing to serve as managers for these
deals.

Bonds are the perfect means to
acquire cash because they give these
military-related institutions access to
large sums of relatively inexpensive,
general-purpose cash, which they can use
for any purpose. Bonds provide real money
(dollars) from U.S. securities firms,
pension funds, insurance companies,
corporations and individuals investing in
them.

The trouble is, this money easily can
be diverted to modernize the armed
forces, acquire military-related
technologies, or even serve as supplier
credits for missile sales to Iran and
Pakistan.

Why should we be concerned if
PLA-related banks and enterprises raise
money through bonds? Because this is the
same PLA that in a 1993 book titled Can
the PLA Win the Next War? identified the
United States as its main adversary and
in 1996 used a nuclear submarine to face
off against the USS Kitty Hawk near the
Shandong Peninsula.

Yet there is more here to be
concerned about than just national
security. These bonds rely on the full
faith and credit of Beijing. And although
the Chinese economy is booming, the
financial sector is in terrible shape. In
the words of The Economist, these same
banks are “unstable and mired in
debt.” Half the bank loans they have
made may have gone bad. While the
government will admit that only 20% have
gone sour, this still amounts to many
times the banks’ capital. Investing in
bonds issued by these banks could be a
disaster waiting to happen.

At these financial institutions,
“accounting principles are
inconsistent and poorly understood,”
notes The Economist, “so the banks’
senior executives are rarely given
reliable information by their loan
officers.”

U.S. pension funds and individuals
who have invested in these bonds could
end up holding worthless paper.

The United States has been down this
path of underwriting potential enemies
before. During the era of detente,
Western banks extended loans to Moscow.
It later was discovered that these
dollars were diverted to upgrade the
Soviet Army, forcing us in turn to
increase defense spending. Ultimately,
the Soviet Union had to reschedule nearly
$ 100 billion in debt. But these recent
bond sales may be even worse. The
interest rates are lower and, unlike bank
loans, bonds cannot be rescheduled. If
you can’t pay, you default.

It should be incumbent on U.S.
pension fund managers to be mindful of
where their investment dollars are going
and to make wise decisions. And there are
also ethical considerations. Public
pension funds rightfully demonstrated a
high degree of social consciousness when
they avoided any investments related to
South Africa during the apartheid era.
China’s human rights record is no better.
Political dissidents are arrested,
tortured and even executed.

Should we really be investing in such
a government? U.S. policymakers must
intervene now to avert a possible
financial catastrophe and the potential
misuse of these funds. Roger Robinson
argues for “a prudent, nondisruptive
and security-minded screening mechanism
for prospective foreign borrowers on the
U.S. bond and securities markets.”
American investors and the U.S.
government should know where our
investment dollars are going and how that
money ultimately might be used.

Peter Schweizer is a scholar at
the Hoover Institution and co-author with
Caspar Weinberger of the book The
Next War.