Casey Institute’s Robinson Lays Bare China’s Most Serious Foreign Borrowing Operation: Penetrating the U.S. Bond Market

(Washington, D.C.): Even as relations between the U.S. and China have plummeted
amidst
revelations of Chinese espionage and attacks on the two nations’ embassies (in the U.S. case an
accidental one in Belgrade, in the PRC’s case a deliberate assault on American facilities in
Beijing), the William J. Casey Institute has made an important discovery: Beijing has
filed
notice of a $500 million bond offering on the Luxembourg and Hong Kong stock exchanges
and will likely follow suit with the SEC in the coming weeks.

The issuer, the government-owned China Development Bank (sponsor,
among other things, of
the culturally and environmentally perilous Three Gorges Dam project, and two nuclear power
plants), claims the proceeds will go toward infrastructure development. As with other bond
offerings, this Chinese issue will amount to a largely non-transparent, undisciplined transfer of
hard currency to Beijing. As such, it should further heighten concerns the Center for Security
Policy’s William J. Casey Chair, Roger W. Robinson, Jr., has done so much to arouse about the
national security implications of this sort of Chinese penetration of the U.S. bond and equity
markets.

In the run-up to the release next week of the Cox Committee report — expected to offer
an
unprecedentedly detailed review of the PRC’s multifaceted operations against U.S. interests and
equities — Mr. Robinson renewed his call for greater oversight and monitoring of Chinese and
other potential adversaries’ involvement in the American capital markets. Excerpts from Mr.
Robinson’s speech before the Alaska World Affairs Council appear below.

Excerpts from

“The National Security Dimensions of the Global Capital
Markets”

By Roger W. Robinson, Jr.

May 7, 1999In the shortness of time, I would like to
fast-forward to some of today’s most pressing security
challenges with respect to the U.S. and global capital markets. I will begin by making what might
be viewed as a counter-intuitive statement: The recent, and to some extent still on-going,
financial crisis in the world’s emerging markets has likely been the most positive, cathartic
development for U.S. security interests since the collapse of the Soviet Union. This is principally
because it slowed substantially undisciplined Western lending to — and investment in —
prospective adversaries of this country, notably China and Russia. The basis for this statement
can probably best be illustrated by looking at China’s activities on the U.S. bond market. After
all, it is China, at least in my view, that represents the most serious threat to U.S. national
security in the first part of the 21^st century.

Today, global ‘bad actors’ have increasingly turned away from Western governments and
commercial banks for financing in favor of tapping private capital markets. Why is this the case?

1. Relatively inexpensive access to large sums of general purpose cash (i.e., no underlying
trade
transactions or projects making it easier to divert these funds for potentially nefarious purposes).

2. The ability to recruit a large new group of lenders (i.e., securities firms, pension funds,
insurance companies, corporations and even individuals).

3. Continued avoidance of conditionally, transparency, discipline and collateral (e.g., some
of the
origins of the Russian default last August).

4. Construction of politically-powerful new constituencies in this country with a financial
vested
interest in ensuring that, for example, China is not subject to U.S. economic sanctions or other
penalties irrespective of their misdeeds (e.g., proliferation, human rights abuses, etc.).

5. Greater confidence that if a country like Russia gets into financial trouble it will be bailed
out
by Western taxpayers in the form of IMF packages and other means.

China has issued some 134 bonds in global markets since 1980 totaling some $26 billion, of
which some $11.5 billion is dollar-denominated. Of these bond offerings, nearly 60% were
brought to market by just 3 entities – all of which should raise yellow or red warning flags: 1)
CITIC ($800 million): PLA arms dealer, Wang Jun, Chairman; 2) Bank of China (over $2
billion): Responsible for money transfers to Charlie Trie and Johnny Chung. Also reportedly
unable to obtain a license to open a branch office in San Francisco reportedly due to
security-related concerns; 3) Chinese government in its own name: $4.2 billion. China’s current
market
presence may be modest now, but not for long. Borrowing in the U.S. markets could expand as
much as five-fold over of the next three to five years.

On the positive side, a $3 billion Gazprom bond offering was derailed in November 1997
after it
was learned that the firm was in violation of the Iran-Libya Sanctions Act (the first time a major
foreign bond offering in New York was primarily withdrawn for national security reasons).

In closing, it is important to point out that the use of economic sanctions as a policy tool is
under
unprecedented attack on Capitol Hill and elsewhere. This is primarily because our allies have
little or no interest in joining us in the multilateral application of such sanctions and the global
business community is strenuously opposed to the loss of exports, profits and jobs which
generally accompany security-minded sanctions.

The principal advantage of turning increasingly to financial sanctions – as opposed to trade
sanctions – is that access to the U.S. capital markets will likely prove essential for large-scale
foreign entities like those of China and generally does not involve any underlying exports or
jobs. These markets, more often than not, prove to be the most efficient means for current and
potential adversaries to attract untied, undisciplined cash with few questions asked concerning
where the money is going and how it is being used. This is not an argument, however, for capital
controls which could backfire badly if improperly managed.

Fortunately, by merely strengthening disclosure and reporting requirements concerning the
activities of foreign government-controlled entities in the U.S. debt and equity markets, we can
get a much better handle on the true identity of these borrowers and greatly reduce the prospect
of American pension fund or mutual fund holders unwittingly helping finance the militaries and
intelligence services of prospective adversaries of this country and their global predations. With
the largest share of the world’s available development capital domiciled in New York City, we
have in our possession the kind of leverage that, if used prudently and constructively, can make
the United States and our allies more secure in the 21st century, even if employed
unilaterally.