Investor’s Business Daily Charts Seismic Shift at Federal, State Levels in Favor of Capital Markets Leverage over Trade Sanctions

(Washington, D.C.): Yesterday’s Investor’s Business Daily (IBD) provided a wake-up
call for
those on Wall Street who have not yet discerned a seminal change in their world: At both the
federal and state levels, policy-makers are increasingly seized with the need to assure more
rigorous transparency and discipline with respect to foreign entities seeking access to the U.S.
debt and equity markets.

As the IBD article by John Berlau makes clear, the requirements of these markets for
strengthened disclosure and expanded “due diligence” — to include national security and human
rights concerns — will only increase in the period ahead, in the face of intensified efforts by
global “bad actors” to fund themselves and their nefarious activities in the U.S. capital markets.
A case in point was the unanimous passage last month of State Senator Ray Haynes’ bill that
would create a Capital Markets Task Force in California to “alert [the state’s public pension
funds] to “national security and human rights concerns.” This bill is likely to serve as a
template for many other states as it reflects a growing concern shared by state legislators and
treasurers and by many public portfolio managers about their constituencies possibly funding
unwittingly foreign enterprises and activities that are inimical to the Nation’s security interests
and fundamental values.

This development is enormously gratifying to the William J. Casey Institute, which has
pursued
over the past four years a “Capital Markets Transparency Initiative” for the purpose of
highlighting the need for a non-disruptive, market-oriented policy response to a rapidly
emerging national security challenge. In the interest of advancing this issue area and its major
policy implications, the Casey Institute will be hosting a half-day symposium on 27 June at the
Library of Congress entitled: “Safeguarding America’s Capital Markets: Lessons from
PetroChina.” Please contact the Center for more information about this ground-breaking
session featuring leading legislators and representatives of the extraordinarily broad-based
coalition that was forged earlier this year to oppose the PetroChina equity offering on the New
York Stock Exchange.

Investor’s Business Daily, 7 June 2000

China’s Foray In U.S. Capital Markets Spurs Closer Scrutiny By
States, U.S.

By John Berlau

The People’s Republic of China won a big victory late last month, as the House of
Representatives voted to grant it permanent normal trade relations when it enters the World
Trade Organization. But that same day, California’s State Senate unanimously passed a bill that
could spell trouble for some of China’s state-owned entities seeking capital from California’s
public pension fund, the nation’s largest.

The bill, sponsored by Republican state Sen. Ray Haynes, would create a task force to review
potential foreign investment by California’s state employee and teacher pension funds and alert
the funds of national security and human rights concerns. Haynes’ background paper on the bill
cites stories carried in Investor’s Business Daily last year as a big reason for the
move.

IBD’s “exposes of Calpers (the California Public Employees’ Retirement System),” it said,
“reveal(ed) that the agency had invested millions of dollars of employee pension funds in
companies with close ties to the Chinese government, the Chinese People’s Liberation Army and
their military intelligence operations.” Some see the Haynes bill and the recent campaign against
state-owned PetroChina’s listing on the New York Stock Exchange as part of a shift in focus by
China’s critics.

“It demonstrates a move away from trade-related considerations to the financial arena,
notably
the capital markets,” said Roger Robinson, the top economic official of former President
Reagan’s National Security Council. “This is a watershed development, and could prove a
template for many other states.”

Critics on both sides of the political spectrum fault China for different reasons: national
security,
religious freedom, and labor and environmental issues. While disagreeing over what to do,
activists agree that U.S. markets are a powerful new way to influence China policy.

“Given that China received PNTR, there may be an increased role for watchdog groups
regarding
human rights and the global economy to look at the financial markets,” said Brandon Rees, a
researcher at the AFL-CIO’s Office of Investment, which advises union and corporate pension
fund managers.

Rees said the AFL-CIO was “actively monitoring” Chinese state companies that plan to raise
money in U.S. markets. One company, China Unicom, plans to list on the New York exchange
June 21. “We’re taking it on a case-by-case basis; not every offering that comes out of China
will have the unique coalition of issues that PetroChina brought forward,” he said.

PetroChina’s offering was opposed by a number of groups, including the AFL-CIO. They
worry,
among other things, that the oil pipeline it’s building in Sudan will help bolster a government
that’s been accused of financing terrorism, condoning slavery, and practicing religious
persecution within its borders.

The company’s initial public offering shrank to $3 billion from $10 billion after public
pension
funds such as Calpers announced they weren’t going to buy it. The U.S. Commission on
International Religious Freedom, created by Congress, also opposed PetroChina’s IPO. In its
May report to Congress, the commission announced that it “will study, and make
recommendations on whether, and under what circumstances, capital-market sanctions…should
be included as a new tool in the U.S. diplomatic arsenal to deal with religious persecution.”

In the Senate, a bipartisan bill would punish businesses operating in China for violating
nonproliferation agreements and export controls with a variety of nontrade sanctions, including,
in extreme cases, forbidding China’s state-owned companies from listing on America’s markets.

Senate Government Affairs Committee Chairman, Fred Thompson, R-Tenn., who sponsored
the
bill along with Robert Torricelli, D-N.J., and seven other co-sponsors, wants a vote on the bill, as
an amendment or by itself, around the same time the Senate votes on PNTR. No date for a vote
has been set yet.

“There is a decent argument that engagement has a chance of helping with regard to their
human
rights activities, but I don’t see that with regard to their proliferation activities,” Thompson told
IBD.

Frank Vargo, vice president for international economic affairs at the National Association of
Manufacturers said, “We don’t like it.” He said Thompson’s bill was “not necessary.” He
argued that “any sanctions ought to be multilateral” or they’ll hurt U.S. interests and won’t be
effective.

But Robinson, now chairman of the Casey Institute at the Center for Security Policy, argues
that
capital market restrictions wouldn’t have the same ill effects as trade sanctions. “In the financial
arena, more often than not there are no underlying trade transactions, exports or jobs, and hence
far less collateral damage to U.S. interests,” he said. “The U.S. will need to take principled
unilateral steps at certain times when we simply can’t permit our allies to have a de facto veto
over our defense of vital U.S. interests.”

Still, Robinson says he generally favors disclosure over “capital controls” or “undue
regulation.”
As an example, he cites parts of Thompson’s bill that requires the Securities and Exchange
Commission to make sure investors know whether companies operating in China have been
involved in arms trading.

Thompson notes that his own state, Tennessee, invested state pension money in China
Resources, which he has termed an “agent of espionage.” He said his bill would “interject some
additional transparency so that these state funds and so forth know more about what they’re
dealing with.”

The California Senate bill and a similar bill in the state assembly are also taking the
disclosure
route. Neither bill requires the state funds to divest any stocks. “I’m not telling them to
disinvest,” said Assemblyman Howard Kaloogian, a San Diego Republican and sponsor of the
assembly bill. “I’m telling them to have some transparency in their investments (and) shine
some light into what they do.”

Kaloogian’s bill, which would require the pension funds to report each year on whether any
of
their international holdings do business in countries or with foreign companies sanctioned by the
U.S., is in limbo. But he hopes to get it passed as an amendment to another bill, and notes that he
has many Democratic co-sponsors.

In a discussion last week, he said, even Democratic Gov. Gray Davis “indicated that he was
in
support of it.” Davis’ office says the governor has not taken a formal position, but the office of
Democratic Treasurer Phil Angelides said the treasurer supports the bill.