Investor’s Business Daily Rejoinder Shows CalPERS, Wall Street Implications of Chinese Penetration of Capital Markets

(Washington, D.C.): For the second time in six weeks, Investor’s Business Daily (IBD)
has
performed an invaluable public service: It has focused a klieg-light on the Nation’s largest
public pension fund, the California Public Employees Pension Fund (CalPERS) which has in its
portfolio at least four Chinese enterprises with reported connections to that country’s military
and/or intelligence services. The first IBD piece entitled “Chinese Army’s Ties To U.S.
Money:
Do California Pension’s Investments Risk Retirements?” was published on 27 July. It
prompted an intemperate response from CalPERS chairman Charles Valdes. For example, his
three-page press release tried to tar the newspaper’s revelations as “modern day ‘McCarthyism’
at its worst.”

Interestingly, the “McCarthyism” label was recently used in another bid to deflect press
scrutiny
concerning dubious financial transactions. As reported by USA Today on 3 September, the
influential Russian newspaper Kommersant slandered Western regulators and investigators
looking into the burgeoning Russian money-laundering/corruption scandal. (Other parallels
and linkages between this scandal and the proliferation of global “bad actors” in the U.S. debt
and equity markets was the subject of a Casey Institute Perspective published last week entitled
“Message to Wall Street and Pennsylvania Avenue: Bank of New York’s Russian Debacle is but
a
Symptom of a Larger Problem.”) The article which appeared on the front-page of today’s
edition of Investors Business Daily follows (emphasis and subheadings added throughout):

A New Type of ‘Calpers Effect’
Funds’ Investments In Chinese Companies Raise Red Flags

by John Berlau

“The Calpers effect.” It’s a common term in the investment world, and it refers to the
tremendous
power the California Public Employees’ Retirement System wields as the nation’s largest public
pension fund.

CEOs quake in their boots, fearing that their businesses will land on Calpers’ annual “dogs”
list
of underperforming companies.

Pension funds and other institutional investors pay close attention to Calpers’ investment
decisions and strategies.

But over the past month, a different kind of Calpers effect has begun.

After Investors Business Daily reported the pension fund was investing millions of
dollars
in companies believed to have ties to the Chinese military or the mainland’s intelligence
networks, concerned lawmakers, national-security analysts and ordinary citizens began
warning other states of potential bad actors in their portfolios.

IBD has learned that public pension funds in at least two other states — Texas and
Tennessee
— have holdings in companies possibly linked to the Chinese military or Chinese
espionage.
Other such investments may be unearthed as state officials face heightened scrutiny from
lawmakers and from employees vested in the funds.

Congressional Interest and State Responses

These revelations have come on the heels of unanimous reports by a special House
committee
led by Rep. Chris Cox, R-Calif., and a bipartisan congressional commission
on weapons
proliferation [chaired by former CIA Director John Deutch] fingered
U.S. capital markets as a
source of weapons funding for potentially hostile powers.

On Aug. 2, Reps. Spencer Bachus, R-Ala., and Dennis
Kucinich, D-Ohio, cited the Calpers
example in a mailing to all 50 state treasurers and attorneys general.

“You may wish to review your state’s portfolios,” the letter said, “to ensure that the true
identity
and purpose of the (foreign borrowers and enterprises) are consistent with the financial interest of
your fund participants, as well as the vital national-security interests of our country.”

Bachus and Kucinich are co-sponsors of a House bill to create a national-security
office in the
Securities and Exchange Commission.

So far, three states have written to Bachus’ office, Chief of Staff Jeff Emerson says.
Shannon
O’Brien, the Democratic treasurer and receiver general of Massachusetts, wrote the
lawmakers, saying she had asked the head of pension-investment management to review
their recommendation.

“I appreciate your bringing this important matter to my attention,” she wrote.

CalPERS’ Diatribe

But Calpers was not so appreciative about the attention brought to its pension-fund
investments.
In a July 27 press release, Calpers Investment Chairman Charles Valdes
blasted the IBD
article as “inflammatory and inaccurate” and “McCarthyism at its worst.”

He then wrote that “allegations that the Chinese military receives some benefit from these
firms
are inaccurate, an analysis of available public information shows.”

Calpers spokeswoman Pat Macht would not share with IBD the “available public
information”
Valdes based his conclusions on.

National-security watchers were stunned at both Valdes’ strident tone and his
defense of
four companies mentioned in the article: Cosco Pacific Ltd., Citic Pacific Ltd., Citic Ka
Wah Bank and China Resources Enterprise.

“The categorical nature of the assertions made was surprising in light of the fact that Calpers
has
publicly stated that they do not conduct any national-security-minded review of purchasing
decisions,” said Roger Robinson, an official on President Reagan’s National
Security Council
and a former vice president of Chase Manhattan Bank.

Robinson was referring to an earlier statement made to IBD by a Calpers spokesman that
national-security risks were “not screened as a part of our (investment) review.”

Others said many of Calpers’ assertions don’t match what’s known about the Chinese
government. “If they’re going to accuse anyone of [McCarthyism] they better get their facts
straight, and this thing is rife with errors,” said Edward Timperlake, a former
national-security
investigator for the House Rules Committee who helped set up the Cox committee.

Timperlake and others took issue with Calpers’ claim that the companies “originated and
have
operated from Hong Kong for many years prior to the reunification of China.”

In fact, the companies are known as “red chips,” extensions of mainland China’s state-owned
enterprises that were first offered on the Hong Kong exchange in the 1980s to raise money for
their parent companies.

Who’s In Charge?

“Most of the key decisions (of the subsidiaries) are still made in accordance with the wishes
of
controlling government bodies,” notes “Red Chips and the Globalisation of China’s
Enterprises,” a 1998 book written by Charles de Trenck, a Hong Kong-based analyst
for Credit
Suisse First Boston, and four other financial analysts.

On that point, “the Calpers press release is misleading at best and deliberately deceptive at
worst,” said California state Sen. Ray Haynes, R-Riverside. Haynes, who’s
vice chairman of a
group of lawmakers who oversee Calpers, said he plans to order a legislative audit of
the
investments.

“They’re trying to tell the world that either they’re very stupid in how they plan their
investing — they don’t research the companies they’re investing in — or they’re trying to
hide something from people,” Haynes said.

Indeed, all it takes is a click onto Cosco Pacific’s Web site to see that the red chip, in its own
words, “enjoys strong business ties and a high degree of synergy with its parent, the China Ocean
Shipping Company.”

Calpers defends the parent, even though the Cox Committee’s report says, “Information
indicates
Cosco is far from benign.”

A separate House task force concluded that “Cosco is actually an arm of the Chinese military
establishment. Customs officials caught a Cosco ship smuggling 2,000 automatic weapons into
the ports of Oakland.”

Calpers said it is an “important fact” the “gun purchase was created by an FBI sting and that
those who were responsible were not from mainland China and have been prosecuted.”

But William Triplett, a former GOP chief counsel for the Senate Foreign
Relations Committee,
said it was “preposterous” to imply that the guns would not have been shipped if there hadn’t
been a sting, which was organized by the Customs Service and the Bureau of Alcohol, Tobacco
and Firearms.

Triplett said it was also “flat wrong” that no one from mainland China was involved, noting
that
midlevel munitions officers have been jailed in China.

Triplett said, “the really hot stuff” about Cosco is probably still classified. The Cox report
stated,
“the Clinton administration has determined that additional information concerning Cosco . . .
cannot be made public.”

Another claim of Calpers that doesn’t square with China observers is that “Citic Pacific is not
a
subsidiary of Citic” and is a respected investment house in Hong Kong “independent of the
Beijing government.”

Citic is chaired by Wang Jun, chairman of Poly Group, a company
affiliated with the Chinese
military. Poly was listed as a subsidiary of Citic in the 1980s. They continue to work together on
some projects.

Wang, who attended a White House coffee in 1996, can’t come back to the U.S., Triplett
says,
because of his suspected involvement in the 1996 arms-smuggling ring aboard the Cosco ship.

The “Red Chips” book calls Citic Pacific “Citic’s publicly listed arm” and notes that Citic
and its
wholly owned subsidiary Citic Hong Kong have a “controlling interest” in Citic Pacific.

“Red Chips” notes that Citic Pacific has occasionally “appeared to bow to political pressure
form
Beijing” in its business practices.

“Red Chips” also notes the Citic Ka Wah Bank, which Calpers also owns shares in, “has
remained directly in the hands of Citic in Beijing.”

Another public pension fund that holds investments in these companies is the
Teacher
Retirement System of Texas, which owns Citic Pacific, China Resources and Cosco.

Ray Sullivan, spokesman for Texas Gov. George W. Bush, who appoints
the pension board
members, said Bush simply “appoints individuals with sound experience and expects them to do
their jobs.” The investment “decisions are made exclusively by the board.”

Tennessee’s state pension fund also has stock in the red chip of the very company
Sen. Fred
Thompson, R-Tenn., called an agent of espionage — China Resources.

Steve Curry, assistant to Tennessee’s treasurer, said it was the federal government’s job to
screen
for national security. He added, though, that the treasurer has read the letter from Bachus and
Kucinich and passed it on to the firms managing the fund’s international portfolio, which also
includes Citic Pacific.