Caution Urged on China Financing

China's growing financial power draws scrutiny as U.S. economic costs rise.
By Michael Lelyveld
2008-12-02
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BOSTON--U.S. regulators should exercise caution as cash-strapped companies turn to China for financing in troubled economic times, experts say.

A recent report by a Congressional watchdog panel raises concerns that China could use its financial clout to further political agendas as Beijing invests overseas.

The annual report of the U.S.-China Economic and Security Review Commission (USCC), released in November, highlights the risks of relying on Chinese state-controlled funding.

China's growing financial power "has concerned many economists and government officials due to uncertainty about the Chinese government's and the Chinese Communist Party's motivations, strategies and possible impacts on market stability and international stability," the USCC said.

The attractions of financing from China have risen along with its foreign currency reserves, which may approach $2 trillion by the end of the year. As the largest foreign investor in U.S. Treasury bills, China is increasingly seen as the funding source for U.S. deficit spending.

The growing interdependence of the two countries in trade, investment, and finance has led some commentators to see Chinese funding as vital to U.S. interests.

"Everyone knows that China is a major power and our representation there is important. But right now, we need Beijing like never before," wrote Newsweek columnist Fareed Zakaria. "China is the key to getting America through the worsening economic crisis."

Political pressures

But others are concerned that financial assistance may come at a political price.

Writing in The New York Times on Nov. 25, Columbia University professor Robert Barnett cited Britain's recent decision to withdraw support for Tibet's autonomous status. Barnett suggested a tradeoff, noting the policy change came after Britain appealed to China for increased commitments to the International Monetary Fund.

"Including China in global decision-making is welcome, but Western powers should not rewrite history to get support in the financial crisis," said Barnett, a Tibet scholar. "It may be more than banks and failed mortgages that are sold off cheap in the rush to shore up ailing economies."

Last week, China postponed an annual summit with the European Union, citing French President Nicolas Sarkozy's plan to meet with the Dalai Lama. The move appeared to confirm the link between Tibet policy and trade interests.

The USCC has raised similar issues in advising watchfulness with regard to China's state-backed financing of foreign investments.

The USCC report said that an affiliate of China's State Administration for Foreign Exchange (SAFE) agreed to buy government bonds from Costa Rica at a low interest rate earlier this year "in return for Costa Rica's severing of diplomatic ties with Taiwan."

The USCC cited the case as "the first confirmed time that China has used its foreign exchange funds as a means of directly applying political pressure."

Numerous risks

The report points to numerous risks in relying on state-controlled funding from organizations including SAFE and the China Investment Corp. (CIC), the country's $200-billion sovereign wealth fund.

The USCC said the financing entities lack transparency and often make investments that are "almost guaranteed to lose money," raising doubts about their motives.

CIC officials have denied plans to obtain advanced technology by investing in foreign high-tech companies. The report quotes a CIC official as saying, "That's political, and we don't do that."

But USCC said that proposed CIC investments "could raise national security concerns" because of Beijing's history in seeking acquisitions to gain U.S. technology in auto manufacturing, telecommunications, and aerospace.

The report cites new powers of the Committee on Foreign Investment in the United States (CFIUS) to review such activities. Last year, Congress enacted the Foreign Investment and National Security Act (FINSA), giving CFIUS added authority to investigate any foreign transaction that may raise national security risks.

Experts told Radio Free Asia that current economic conditions are likely to lead to increased watchfulness.

William Reinsch, a USCC commission member and president of the National Foreign Trade Council in Washington, said the USCC report does not reflect any current cases of Chinese investment in the United States that pose a security risk. But the panel is showing caution about the huge pool of China's foreign exchange.

"Some of my colleagues are concerned about it," Reinsch said. "I think they are concerned about the potential, as anybody would be."

Reinsch believes the enhanced CFIUS powers are sufficient to guard against any loss of vital technology through overseas investment.

"It's a little bit of a dilemma," Reinsch said. "If you're worried about something, do you sit and wait for it to happen before you do anything about it or do you try to crank up your review process a little more quickly in anticipation of it happening so you don't wake up too late?"

Financing concerns

Reinsch called the Costa Rica case "more of a policy issue than a security issue," adding that both mainland China and Taiwan have tried over the years to sway countries on the recognition question.

Adam Segal, senior fellow for China studies at the Council on Foreign Relations in New York, said there are both broad and narrow concerns with Chinese financing in the United States.

On the broader side, Segal said Beijing could be tempted to influence U.S. policies by stopping its Treasury bill purchases or using its dollar holdings to exert economic pressure. Some analysts argue that such attempts would prove costly for the value of China's reserves, though.

Despite the potential cost to China, Segal believes some risk of pressure on the United States exists.

"Clearly, economic interests don't always come first and you could imagine some political scenarios where the Chinese would be willing to make a political point at an economic cost," Segal said.

U.S. policy-makers should be watchful for China's economic leverage, but that may mean little more than preserving the existing diplomatic balance between the two countries, said Segal.

"The Chinese will be very careful about trying to make some kind of explicit tradeoff, but I think implicit tradeoffs are part of diplomacy and they always occur," Segal said.

On the narrower front, Segal said that some of China's investment interests have faced obstacles because of concerns about losses of U.S. technology. That was the case last March, when the Chinese telecommunications giant Huawei dropped its bid for a share of U.S. equipment maker 3Com Corp. after reported resistance from Washington regulators.

But Segal said there are procedures in place to make sure that Chinese investment does not threaten U.S. security.

"As long as the money isn't going into some very narrow range of technology or infrastructure investment, we should be welcoming it," he said.


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