Sen. Thompson Offers Way to Create Leverage to Thwart P.R.C. Proliferation by Putting Its Access to U.S. Capital Markets at Risk

(Washington, D.C.): Following a hugely successful effort last month by a broad-based coalition organized to stymie China’s flagship effort to penetrate the U.S. capital markets — a hoped for $10 billion initial public offering by PetroChina that actually generated less than $2.9 billion — the influential chairman of the Senate Governmental Affairs Committee, today took dramatic action: Sen. Fred Thompson (R-TN) unveiled plans to introduce an amendment to pending legislation providing Permanent Normal Trade Relations (PNTR) status for the PRC (see attached summary). As a press release issued by the Senator’s office put it, the Thompson amendment, or parallel legislation, is designed to “provide an annual review mechanism and escalating scale of responses to future Chinese proliferation of weapons of mass destruction, missile technologies and advanced conventional weapons.”

This legislative initiative would seek to impose immediate sanctions on proliferating Chinese entities as well as a series of graduated penalties on Chinese firms more broadly. Specifically, should a Chinese entity be found to have engaged in proliferation activities, any one of four “Tier 1” responses would be immediately required. Among these options is included the denial of access to the U.S. debt markets for Chinese state-owned firms. Should China continue to proliferate, additional “tiered” responses would be triggered — ultimately including the denial of access to the U.S. capital markets for all Chinese entities.

This creative, option-oriented policy approach to treating what even President Clinton acknowledges is the foremost threat to America’s survival in the 21st century — namely the proliferation of weapons of mass destruction (WMD) and ballistic missile delivery systems — holds real promise for persuading the Chinese leadership that its exceedingly dangerous activities in this area are incompatible with membership in good standing in the global trade and financial communities. Eventually, this message of U.S. resolve embodied in this system of calibrated disincentives needs to be sent to the world’s other proliferators, as well.

Among the advantages of utilizing capital market versus trade sanctions in response to known proliferators is the relatively minor “collateral damage” that accrues to U.S. interests in the event such sanctions are triggered. Specifically, in most cases, Chinese efforts to raise funds on the U.S. stock and bond markets do not involve underlying trade transactions, U.S. exports, jobs, people-to-people contact or questions of “foreign availability.” Although Chinese proliferators denied access to U.S. capital markets can to some extent go elsewhere for funds, doing so generally carries the burden of additional costs and, over time, would likely jeopardizes the availability of adequate funding as the world’s thinner-volume non-U.S. markets become “booked up.”

Irrespective of the ultimate disposition of the Thompson amendment, U.S. fund managers, state and municipal governments and investment bankers would be wise to appreciate that this visionary congressional call for strengthened, national-security-minded discipline, transparency and “due diligence” in the U.S. capital markets is a sign of things to come. It behooves them, through voluntary action, to help ensure that American investors are not unwittingly underwriting expanding threats to the very survival of our country and people.