Nexus between US-China security relations and America’s capital markets

The U.S.-China Security Review Commission (USCC) on Tuesday, October 2, published on its web-site (www.uscc.gov) a lengthy report prepared by Adam Pener, Senior Analyst of the William J. Casey Institute of the Center for Security Policy on China’s presence in the U.S. capital markets and a review of the funding efforts of higher-risk foreign firms and governments in this country. The report, entitled "Capital Markets Transparency and Security: The Nexus Between U.S.-China Security Relations and America’s Capital Markets," was completed at the end of June, but only released last week for public comment.

In presenting the report for public review and comment, Maryland Assemblyman Richard D’Amato, Chairman of the U.S.-China Security Review Commission, noted the following:

This background paper, to our knowledge, is the most comprehensive of its kind. The Commission welcomes public reaction and comments and the national debate that the report will hopefully stimulate. Such a debate can only enrich the Commission’s understanding of the merits and limitations of capital markets transparency and leverage, and should help lay the groundwork for our Commission hearing on China’s fundraising activities in the U.S. capital markets presently scheduled for December 6, 2001. Finally, at this time of national trauma when policy-makers are reviewing carefully the full array of financial policy tools and options to combat the scourge of international terrorism and those that aid and abet it, this comprehensive report should help stimulate a needed national debate.

Among the topics and issues covered by Mr. Pener’s report are: China’s near term hard currency requirements; funding strategies and patterns of the PRC government; case studies of past clashes between the markets and national security-, human rights- and religious freedom-related concerns; systemic shortcomings that facilitate the penetration of the U.S. markets by global "bad actors"; and the possible use of capital markets leverage to advance vital U.S. security interests.

As the Administration and those on Capitol Hill seek to gain a more sophisticated understanding of disclosure shortfalls with respect to Chinese and other foreign registrants in our markets, this groundbreaking report should prove most useful. It should also help illuminate new national security-related risk factors — particularly in the post-September 11 era — that need to be incorporated into the "due diligence" risk assessments of investment banks, fund managers and other market players.

The U.S.-China Security Review Commission is to be commended for its vision in evaluating this 21st century issue area and for seeking to engage the financial community and other outside experts in the effort to define appropriate market-oriented remedies to address this emerging challenge to investors, corporate governance advocates and our nation’s security interests.