China Hawks Are Starting To Draw Blood
To many, when Chinese President Jiang Zemin rang the opening bell at the New York Stock Exchange on Oct. 31, it symbolized China's determination to adopt a market economy. But those in the anti-China lobby in Washington just saw red.
Jiang's presence in the citadel of capitalism was almost sacrilege to conservative Republicans. Now, the China hawks have begun a campaign to limit China's access to U.S. capital markets. They fear that some of the funds being raised by Chinese entities from U.S. investors--about $7 billion this year alone--will be funneled to the Chinese army. They also claim Chinese executives and their government overseers engage in insider trading and don't disclose important information, which could hurt U.S. investors.
There is no evidence of securities law violations. But to the dismay of Wall Streeters, the China hawks are meeting with some success. Leading the charge are Republican Senators Alfonse M. D'Amato of New York and Lauch Faircloth of North Carolina. D'Amato, the Senate Banking Committee chairman, has asked the Securities & Exchange Commission to explore allegations of securities law breaches by Chinese companies. Faircloth, a Banking subcommittee chairman, held hearings on Chinese stock offerings on Nov. 5. Faircloth and House Rules Chairman Gerald B.H. Solomon (R-N.Y.) have offered legislation to start a National Security Office at the SEC to monitor foreign companies with ties to their governments that sell securities in the U.S. The SEC declined comment.
Faircloth says China lacks a regulatory system to protect investors and he doesn't trust the Chinese to abide by the securities laws of the U.S. Chinese securities "are filtering their way into the retirement funds of Americans, and there's no supervision," he says.
"DANGEROUS GAME." D'Amato and Solomon are also asking the SEC to investigate several recent offerings underwritten by such prominent firms as Goldman, Sachs & Co. and Morgan Stanley, Dean Witter, Discover & Co. Goldman Sachs and Morgan Stanley insist they followed the letter and spirit of U.S. securities law.
Fueling the campaign is Randolph Shih Shung Quon, a Chinese-American financial adviser. Quon gets office space and political support from the Free Congress Foundation, a conservative think tank. An adviser to the Chinese central bank from 1993-95, Quon claims he uncovered fraudulent activities among some of the children of China's political elite, and had to flee to the U.S. after reporting it.
Quon believes the Chinese government can't be trusted to follow SEC rules. He points to an Oct. 15 statement by Wu Jichuan, minister of posts & telecommunications, reported in Hong Kong newspapers just before the $4.2 billion offering of China Telecom. As the Hong Kong market was tanking, Wu sought to buoy the upcoming IPO by hinting that the government would soon hand over valuable government assets to the new company. Wu also said that he would allow China Telecom to book certain network fees that normally would go to the government. Says Quon: "The Chinese government doesn't intend to play by the rules. They play a dangerous insider's game." Goldman Sachs managing director J. Michael Evans says that Wu was only repeating points made in the China Telecom prospectus and that any asset or fee adjustments would have to be disclosed and pass muster at the SEC and the Big Board.
Quon also says the China Telecom prospectus, filed with the SEC, failed to disclose that Hong Kong billionaire Li Ka-shing was censured in 1986 by a Hong Kong tribunal for participating in an insider trading scheme. Companies controlled by Li were among a small group of "strategic investors" who were allocated 42% of the China Telecom offering at the $1.50 IPO price. This group controls 10% of China Telecom; the Chinese government controls 75%. Evans says the prospectus only had to disclose the price Li paid to buy the stock and his lockup agreement that says he can't sell his shares right away.
Quon denies he is waging a personal vendetta. "I'm just trying to raise public consciousness so people don't lose money," he says. But to Goldman Sachs and many on the Street, Quon and his anti-China friends have run amok.