Tag Archives: Divest Terror/Terror-Free Investing

A Job for C.F.I.U.S.: Proposed Chinese Buy of U.S. Telecommunications Assets Needs National Security Scrub

July 2, 1999Center for Security Policy

(Washington, D.C.): On 23 June, Hutchison USA announced its investment of $957 million
into
the combined telecommunications company of Voicestream Wireless and Omnipoint. Hutchison
is already the largest shareholder in Voicestream, owning 24% of the company and its latest
investment will increase its ownership to 30% of the newly merged conglomerate. Normally,
such an announcement would not receive a second glance in the morning edition. Since, on
closer inspection, Hutchinson is not a run-of -the-mill American corporation, this transaction
demands a careful review by national security-minded agencies of the U.S. government and,
most especially, by the Committee on Foreign Investment in the United States (CFIUS).

What Exactly Is Hutchinson?

Hutchison USA is a division of the large Hong Kong business conglomerate,
Hutchison
Whampoa, whose business ventures include real estate, port ownership in Asia, Europe
and
Panama, retail and manufacturing, and telecommunications and energy projects. Owned largely
by billionaire Li Ka-shing, the company has recently initiated an extensive
overseas acquisition
strategy.

Among other companies, Li is also the principal owner of the Panama Ports Company and
China
Resources Enterprise which collectively control four major ports at the eastern and western entry
points to the Panama Canal. In a recent hearing before the Senate Committee on Foreign
Relations on U.S. interests in the Panama Canal, a former Chairman of the Joint Chiefs of Staff
and Chief of Naval Operations, Admiral Thomas H. Moorer (USN, Ret.)
raised an alarm over
Hutchison’s role — and that of the Chinese government — in Panama. As Adm. Moorer put it:

China Resources
Enterprise,

Adm. Moorer added:

this company is controlled by the Communist Chinese.

Just What Is China Resources Enterprise?

On 16 July 1997, Senator Fred Thompson (R-TN) was quoted by the
South China Morning
Post as saying that China Resources Enterprise acts as “an agent of espionage —
economic,
military, and political — for China.” He also has observed that CRE has “geopolitical
purposes. Kind of like a smiling tiger; it might look friendly, but it’s very dangerous.”

In their best-selling book, Year of the Rat, Edward Timperlake and William C.
Triplett III
claimed that China Resources “had previously been identified as an associate of Chinese military
intelligence.” The authors also identified ties between Li Ka-shing and known arms-smuggler
Wang Jun, head of Polytechnologies, an enterprise closely associated with the
People’s
Liberation Army.

Troubling ‘Connections’

According to [an investigative report entitled href=”http://www.afpc.org/issues/panama.htm”>”The Panama Canal in Transition” which was
published by the American Foreign Policy Council on 23 June 1999], Li Ka-shing’s connections
to Chinese government and government-connected entities are extensive — and worrisome:

Polytechnologies Company, the
international outlet for Chinese weapons sales.

China International Trust and Investment
Corporation

Jun’s fellow CITIC Board member is Mr. Li Ka-shing,
chairman of Hutchison Whampoa Ltd.

Li Ka-shing has profound ties to the Beijing regime.

Li has served as a middle man for PLA business dealings with the
West.

Li Ka-shing attempted to issue $2 billion in bonds, through
his Hutchison company, in the United States. According to the Dow Jones
Newswire, Hutchison revealed that 50 percent of the bonds would be used
through a subsidiary known as Chung Kiu Communications Ltd., which
had signed agreements to provide cellular services and equipment to joint
ventures between the People’s Liberation Army and the Chinese Ministry of
Posts and Telecommunications.

The Bottom Line

The Committee on Foreign Investment in the U.S. (CFIUS) is responsible for analyzing the
national security implications, if any, of prospective mergers and acquisitions which involve the
purchase of American companies by international investors. When concerns are expressed about
such implications, CFIUS has a 90-day period to examine the national security ramifications of
such transactions. If necessary, it can extend its review in order to undertake a more lengthy and
thorough investigation of these implications. It is required to submit a report and
recommendations to the President based on its findings. If the President deems the prospective
merger or acquisition to be a threat to U.S. national security, he may restrict or bar the foreign
investment.

The possibility that harm to American security interests could arise from the Hutchison
purchase
of a large stake in Voicestream Wireless and Omnipoint makes this transaction a candidate for a
CFIUS review, even though it is nominally a U.S. entity. To do otherwise may set the precedent
that by merely incorporating a subsidiary in the U.S., any foreign owned and operated company
would be eligible to acquire — or merge with — U.S. security-sensitive firms without CFIUS
review. If the Clinton Administration — which has shown itself astoundingly indifferent to the
dangers posed by China’s penetration of the U.S. nuclear weapons complex, political system and
economy — proves reluctant to commission such a study, it should be mandated by the Congress.

¹ For more on CITIC, see Casey
Perspectives entitled Hedging Financial Bets In China: Will
‘ITIC’s’ And Other Entities With P.L.A. Connections Be Bailed Out By Beijing? ( href=”index.jsp?section=papers&code=98-C_182″>No.98-C 182,
12 November 1998); and Market Confidence In ‘China Inc.’ Appropriately Shaken —
G.I.T.I.C.
Bond Default A Taste Of What Is To Come (No. 98-C
177, 29 October 1998).

Wall Street Journal‘s Melloan Inveighs Against Russian Aid

May 18, 1999Center for Security Policy

(Washington, D.C.): The recently completed Senate Armed Services Committee mark-up of
the
Fiscal Year 2000 defense authorization bill includes calls for long-overdue improvements in the
management and oversight of — and for greater accountability for — several Defense and Energy
Department non-proliferation programs in the former Soviet Union. Of particular concern have
been those pursued in connection with the so-called Cooperative Threat Reduction (or
Nunn-Lugar) program, whose stated purpose is to reduce the danger posed by the
Kremlin’s ongoing
weapons of mass destruction activities.

This legislative action appears to have been prompted by growing concerns about the
diversion of
such funds into foreign bank accounts and undesirable military-related activities in Russia —
concerns that have only been exacerbated by the increasingly chaotic, not to say revanchist, state
of the Russian political system. These apprehensions are enunciated with characteristic eloquence
in today’s Wall Street Journal in an opinion piece by editorial board member and
columnist
George Melloan. In the attached op.ed.,
entitled “Naiveté in ‘Engaging’ Russia Carries a High
Price Tag,” Mr. Melloan properly takes the Clinton Administration to task for its failure to
understand the true character of the present Russian government, to which Messrs. Clinton, Gore
and Talbott remain wedded:

The result of the voter defection [from the democratic reformers] has been the comeback of a
Communist Party that kept Russia in thrall for 72 years, preserving its Third World living
standards while the Western democracies were getting rich. It should come as no surprise that
these Neanderthals have no ideas for solving Russia’s economic problems. Their dreams
of
power and fortune rest not on true reform but on either preserving today’s chaotic status
quo or turning back the clock. They remain good at what they do, politics — but only
for their
own benefit. They run a disciplined political organization and exploit the nationalistic emotions of
that still-large part of the Russian population that remains ill-informed and unsophisticated.

The Bottom Line

The Clinton Administration’s Russia policy is in urgent need of congressional oversight. In
particular, General Accounting Office audits and other investigations are required into the policies
and practices of those like Assistant Secretary of Energy Rose Gottemoeller 1 and others who
have used the Cooperative Threat Reduction accounts as a slush-fund for appeasing corrupt
Russian apparatchiks and subsidizing the military work of the Kremlin’s weapons of mass
destruction scientists.

Such adult supervision is especially needed at a moment when the Administration is frantically
trying to purchase Russian mediation as a deus ex machina for its Kosovo debacle. 2 It is a safe
bet that the Clinton Administration — if left to its own devices — will pour further money down
Russia’s black hole, in amounts that will make the latest, wasted $4.6 billion IMF disbursement
pale by comparison.

1 See the Center’s Decision Briefs entitled
Clinton Legacy Watch #41: Security Meltdown at
DOE (No. 99-D 48, 26 April 1999),
Senate Given Another Opportunity to Reject Clinton’s
Policy of Denuclearization: the Gottemoeller Nomination ( href=”index.jsp?section=papers&code=98-D_166″>No. 98-D 166, 29 September 1998),
and Study Co-Authored By Candidate for Top Pentagon job Is
Alarming (No. 97-D 96, 12 July
1997).

2 See Russia Ex Machina ( href=”index.jsp?section=papers&code=99-D_45″>No. 99-D 45, 20 April 1999).

‘Follow the Money’: The Next Shoe to Drop on China Scandal Should be Its Penetration of the U.S. Bond Market

May 13, 1999Center for Security Policy

(Washington, D.C.): At long last, the extent of China’s financial penetration of the U.S.
electoral
process and financial system is beginning to receive appropriate attention from America’s
mainstream press, thanks to side-by-side front-page articles in yesterday’s New York
Times.

One piece reported on the testimony supplied Tuesday to the House Government Affairs
Committee by the Democratic National Committee’s campaign finance whiz
kid-turned-government witness, Johnny Chung. Chung confirmed that some
$300,000 was covertly
provided him by General Ji Shengde, chief of China’s military intelligence
agency, with the
simple message: “We hope to see [President Clinton] reelected….We really like your president.”

In a companion article, Pulitzer Prize-winner Jeff Gerth and Tim Golden unearthed evidence
that
the Chinese military and/or intelligence services were probably using a Californian bank,
Far
East National, as a conduit for highly suspicious but, as yet unconfirmed, purposes.
U.S.
officials reportedly believe that “tens of millions of dollars” may have been utilized in the
mid-1990s to pay for illegal political contributions, to underwrite technology theft, to support
intelligence operations in the United States, etc.

Enter the Bond Market

While efforts in Congress and the press to uncover and comprehend the full magnitude of
China’s
financial penetration of the American political and economic systems have revealed operations
involving troubling infusions of hundreds of thousands and even tens of millions of dollars from
the PRC, to date, they have not addressed a potentially more serious problem: The
People’s
Liberation Army’s successful initiative that is taking hundreds of millions, even
billions, of
dollars out of the United States, thanks to Chinese fund-raising in the U.S.
bond market. ¹

As the attached article by William J. Casey Chair Roger W. Robinson, Jr. makes clear, there
has
been an estimated $10.5 billion in dollar-denominated bonds issued by China in the U.S. market
since the early 1980s. Even a cursory review of this rapidly growing portfolio demonstrates that
nearly 60% of this amount was raised by just three Chinese entities — all of which
should be
viewed with concern: China International Trade and Investment Corporation
(CITIC),
chaired by China’s most notorious arms dealer, Wang Jun (about $800 million); the Bank
of
China (over $2 billion); and the People’s Republic of China, borrowing under its own
name (an
estimated $3.2 billion).

It is entirely plausible, if not likely, that at least a portion of these funds raised from
U.S.
securities firms, pension and mutual funds, insurance companies and other newly recruited
lenders were diverted to finance activities harmful to U.S. security interests — a point
that
may be addressed in the long-awaited Cox Committee’s report that will reportedly be released
next week in an unclassified form. No less worrisome is the fact that these funds are creating
financial vested interests on the part of these new politically-powerful U.S. constituencies to
oppose economic sanctions and other penalties almost irrespective of the gravity of China’s
misdeeds (e.g., proliferation, human rights abuses, etc.).

The Bottom Line

In the aftermath of the Chinese government’s direct involvement in the trashing of the U.S.
embassy in Beijing — including its approval of placards urging Chinese to “kill Americans” — the
time has come for a thorough reassessment of the Clinton Administration’s policy of engagement
with China on the PRC’s terms. (An eloquent argument for such a reassessment is made in href=”index.jsp?section=papers&code=99-C_57at”>the
attached column by Jim Hoagland which appears in today’s Washington Post.)

Part of that reassessment must be a redoubled effort by congressional and media investigators
to
follow the Chinese money trail into the U.S. debt and equities markets. Such an exercise should
quickly establish the need for improved reporting and disclosure requirements with respect to all
foreign government-controlled entities seeking to enter the U.S. capital markets.

One approach to advance this objective was put forward in the last session of Congress in
“The
U.S. Markets Security Act of 1997″ (S . 1315), legislation co-sponsored by
then-Senator
Launch Faircloth (R-NC) and then-Rep. Gerald Solomon (R-NY). ² It would have established an
Office of National Security at the Securities & Exchange Commission to implement these
sensible,
non-disruptive, reporting requirements. Prudent steps like these would help avoid the
need for
more draconian measures (i.e., capital controls) that might attract political support as the China
scandal continues to unfold and, in particular, as the newest dimension of the money trail — the
penetration of America’s capital markets — comes to public attention.

¹ See the Casey Institute’s Perspectives entitled
Will China’s latest Bond Offering Penetrate
U.S. Markets, Institutional Portfolios Through A ‘Backdoor’? ( href=”index.jsp?section=papers&code=98-C_197″>No. 98-C 197, 9 December
1998) and Hedging Financial Bets In China: Will ‘ITIC’s’ And Other Entities With
P.L.A.
Connections Be Bailed Out By Beijing? (No.
98-C 182, 12 November 1998).

² See Sen. D’Amato’s Committee Serves Notice On
Those Who Aid And Abet U.S.
Adversaries: No Fund-Raising On American Markets ( href=”index.jsp?section=papers&code=97-C_161″>No. 97-C 161, 30 October 1997).

Will Clinton Get Away with Permitting the I.M.F. to Reward Russia For Its Efforts to Subvert NATO in the Balkans?

April 1, 1999Center for Security Policy

(Washington, D.C.): The image of Russian Prime Minister Yevgeny Primakov and Serbian
dictator Slobodan Milosevic mugging for the cameras in Belgrade says it all: Under its
career-KGB-thug-turned-premier, Russia is once again pursuing policies — in the
Balkans and
elsewhere — that are very much contrary to American interests. The Kremlin’s
announcement yesterday that it is sending as many as seven warships to the Adriatic, including
one equipped to intercept and relay to Belgrade sensitive NATO communications, ¹ probably
coincides with another, undeclared agenda item in the Primakov-Milosevic talks:
Moscow’s
covert resupply of the Serb military and perhaps the provision of Russian “volunteers” to aid in
the defense of an embattled, fraternal Slav nation.

Given this backdrop, what is one to make of the Clinton Administration’s decision to permit
the
International Monetary Fund to make a further $4.8 billion disbursement to an uncreditworthy
Russia? Since Moscow is in default to numerous international creditors and since there is
abundant evidence that it has squandered previous IMF disbursements (including the diversion of
huge sums to a secret offshore bank accounts of corrupt Russian officials and their patrons among
the country’s oligarchy), this new loan cannot be justified on its merits.

The latest IMF disbursement to Russia offers but the most recent proof that the IMF
decision-making process has become utterly politicized. ² The politicization, however, has
increasingly seemed a product of what amounts to Russian coercion and blackmail of the U.S. and
other Western governments, fearful that the Kremlin might behave even more boorishly if such
financial life-support is not forthcoming.

Strike While the Iron is Hot: New Money and
Forgiveness

As the Communists are fond of saying, “it is no accident, comrade” that two
critical financial
negotiations between Russia and the West are coming to a head at the very moment that Kosovo
is breaking badly for the U.S. and NATO — and as concerns are intensifying with regard to
prospective Russian involvement in the conflict. Consider these less-than-coincidental
developments:

‘Russian Clean-up’ of Moscow’s IMF Debts:
The Washington Post reported in a 31
March article entitled “Politics Central to Russian Loan” that IMF officials admit that the
purpose of releasing these funds is what is known in the banking business as a “Chinese clean-up”:
Borrowing funds to pay debts arising from previous loans so as to avoid a default on
those earlier obligations — in this case, Russia’s arrearage to the IMF. Barring such an IMF
debt roll-over, Russia would likely be forced to add sovereign bonds floated in Europe and the
U.S. to their growing list of defaults. ³ More importantly,
defaulting on IMF debt would
effectively eviscerate what little remains of Russia’s creditworthiness.

the economic
program to
which Primakov’s government has committed itself is an unachievable ruse.

Post

“The unpleasant truth is that Russia has not taken the necessary steps
to promote its own
prosperity; its economic policy cannot ensure good use of IMF funds….Russia…has yet to muster
the political will or consensus to push reforms through. It is ‘stuck halfway’ between communism
and capitalism, as President Boris Yeltsin acknowledged in a speech Tuesday, with a ‘freakish
model…a hybrid.’ This hybrid has produced corruption, disillusion and economic decline.”

⁴

Financial Times

Soviet-Era Debt Forgiveness: Building upon Primakov’s success in
euchring the IMF into a
further multi-billion disbursement, his First Deputy Prime Minister, Yuri
Maslyukov, sent a
second shot across the Western bow on 30 March. He declared Moscow’s intention to
request that London and Paris Club lenders forgive (read write-off) upwards of 75% of
the outstanding Soviet-era debt.

— and for Western private sector creditors.

foregoing repayments to Western
tax-payers in order to facilitate future repayments to Moscow’s commercial creditors.

The Bottom Line

By signing the IMF agreement and considering a forgiveness scheme for
Soviet-era debt, the
West has signaled to the world that it is willing to use the IMF as little more than a foreign
policy slush fund — and an unsuccessful one at that. It has apparently made these
financial
concessions in the fatuous belief that Russia will actually live up to promises not to break the arms
embargo — or insinuate itself in other unhelpful ways into the NATO-Serbia conflict. It is
apparent from the Primakov trip, the deployment of one or more warships into the Balkan theater
and President Yeltsin’s call today for a “G-8” foreign ministers’ meeting on the crisis in Moscow,
that the Clinton Administration and its European allies got it wrong again.

Worse yet, the high price paid to dissuade Moscow from undertaking such
mischief may be shown
to be even more unwarranted if, as seems likely, Milosevic is able to finish his “ethnic
cleansing” in Kosovo over the next few days. This campaign will then have succeeded
in
leaving a third or more of the native population of Albanian origin (not just the KLA) dead,
hostage or displaced by Serb death squads and other troops and ceding to Milosevic’s control of
virtually every cultural and economic asset of any value in the province. In that circumstance,
Milosevic may well unilaterally cease hostilities and it is unclear whether the
West will be
willing to keep up the bombing, let alone send in ground forces to retake and repopulate this
region. Milosevic will then be able to rearm at his leisure while handing NATO and its leader,
President Clinton, a decisive and humiliating defeat as Serbia’s fiftieth anniversary present.

¹White House Press Secretary Joe Lockhart yesterday understated
substantially the ominous
implications of this step, suggesting that it risked sending a signal to Belgrade that Russia’s
commitment to stay out of the conflict “may not be rock solid.”

² See Casey Perspectives entitled
‘Read Me’: Before Congress Gives the I.M.F. More Bailout
Authority, It Should Consider Findings of Casey Asia Symposium (No. 98-R 140, 27 July 1998);
Wall Street Journal Joins Casey Institute on Right Rx For Russian Financial
Crisis: ‘It’s the
Private Sector, Stupid’ (No.
98-R 130, 14 July 1998); and As Expected, Russia Gets a Bail-Out —
But
It Won’t Get Moscow Through Next Year, or Protect U.S. Security
Interests (No. 98-C 128,
13 July
1998).

³The devastating effects of default to the IMF should not be
underestimated. Russia is currently
teetering on the brink of an economic meltdown and a default of this nature would effectively cut
Moscow off from additional foreign private credit flows for a debilitating period of time.
Interestingly, yesterday, according to the Financial Times Standard and Poor’s credit
agency
downgraded Indonesia to a credit rating of selective default, “the lowest rating possible for a
sovereign nation” for defaulting on a $210 million commercial loan. Russia’s external debt is in
excess of $150 billion.

⁴In a recent lecture by Dr. Andrei Illarionov, Director of the Institute
of Economic Analysis,
Moscow, the economist revealed that the numbers found in Russia’s official budget “had been
doctored.” Of note, he estimates that the actual budget deficit in Russia will be in the range of
8-14% of GDP, not 2.5% as predicted by government officials.

Foreign Lenders Head For The Exits In China

February 9, 1999Center for Security Policy

(Washington, D.C.): Roughly one year ago, the Casey Institute made a bold prediction early
in
Asia’s dramatic financial downturn: “The next shoe to drop in Asia is likely to be China.” ¹ By
contrast, the conventional wisdom held that the PRC would remain insulated from the region’s
economic dislocation due to China’s non-disclosure or “fudging” of financial statistics, the
non-convertibility of its currency, its seemingly impressive hard currency reserves (which could
be
called upon to prop-up its bad-debt-laden banking sector), and the fact that it still enjoyed at the
time robust foreign direct investment (which should have enabled liquidity shortfalls to be
postponed, or at least blurred).

The attached editorial in today’s Wall Street Journal bears out the Casey
Institute’s
prognosis that nothing short of a complete restructuring of China’s financial and banking
systems would stave off a slow-motion economic train wreck in the PRC. It also
suggests
that those who bet on the conventional wisdom have learned a costly — but useful —
lesson. ²

The Squeeze

By the time China allowed Guandong International Trade and Investment Company (GITIC)
to
go under in late October of last year, the trend was apparent: Thanks, in large part, to the
“emerging market” meltdown that occurred in late 1997 and in 1998, the mainland experienced a
sharp reduction in foreign direct investment flows. As the Wall Street Journal
reported on 8
February 1999, this flow of capital suffered a roughly 50% drop-off in the corresponding periods
in 1997 and 1998. When the government walked away from one of its largest so-called
international trade and investment companies (ITICs) in Guangdong — thereby permitting it to
default on roughly $4.7 billion of hard currency debt, much of it owed to foreign investors and
creditors — an already apprehensive market was further shaken.

In the wake of this decision, the Institute pointed out that — notwithstanding the long-term
economic benefits that would accrue if such insolvent entities were allowed to go belly-up — the
short-term effect would be to exacerbate an already serious liquidity squeeze in the ensuing
months: “[T]he closing of GITIC could well be the first step toward a debilitating, nation-wide
liquidity crisis.” ³

As it happens, that liquidity crisis is continuing to intensify according to reports in the 8
February
editions of the London Financial Times: “Several foreign banks are taking more
aggressive steps
to recover money from Chinese borrowers, such as calling in loans and demanding accelerated
debt repayments[and] international lenders have begun cutting off credit to Chinese
borrowers.”

The reason for this seeming race to reduce Western credit exposure in China is clear:
Foreign
creditors and investors are now questioning the ability of Chinese entities to repay loans
and the government’s willingness to step in if default appears imminent. Unlike the cases
of
Russia, South Korea and Thailand, where sovereign debt crises served to worsen liquidity
problems in the private sector, China has taken pains to cordon off its “economic zones” from a
still-solvent central government. If the accelerated loan repayments, diminished credit lines and
declining interbank deposits seem at the moment unlikely to spur a wholesale economic collapse,
they do appear to be symptoms of more serious problems to come.

‘Red Chips’ in the Red?

In addition to the increasing financial pressure which China now confronts, a number of other
worrying indicators have hit the computer screens of global traders and investment bankers this
year:

China’s Civil Aviation Administration has indicated that the country will have to
delay the
delivery of an unspecified number of new airplanes (at least 50) slated to arrive before
the
year 2002, ostensibly because capacity outstrips demand in a sluggish travel market.

Shandong International Power Development Company postponed indefinitely a
scheduled $285 million initial public offering (IPO) due to “highly volatile market
conditions.” Of particular interest was the lead manager’s inability to garner orders from
“the
six investment banks it hired to help sell the shares.” More importantly, this offering —
along
with two others which have recently been withdrawn — was seen by many market observers as
a litmus test of China’s post-GITIC credit environment.

The Hang Seng index in Hong Kong has lost nearly 25% of its value
since 1 January with
so-called “red-chips” hit particularly hard.

Individually, any of these developments would probably be seen as constituting little
more
than a temporary glitch in the system. Taken together, however, they illustrate the fraying of
market confidence in China.

Bottom Line

Beijing’s decision not to prop up ailing regional investment trusts has proven to be, at least in
the
short-run, a momentous decision. As the Casey Institute expected, a liquidity crisis has emerged
as foreign lenders and investors quickly appreciated that “moral hazard” — or the
government
intervening to make them whole — was no longer a sure thing in China. The jury is still
out:
Has the Chinese government triaged its financial sector by permitting selected bankruptcies while
implementing needed structural reforms, particularly with respect to the huge overhang of
non-performing loans? Or will this sector wind up taking greater-than-expected hits as foreign
capital
flows contract, exports suffer (as the firms most immediately affected are manufacturers and
conduits for exports), growth slows to below 7% and China is forced to devalue its currency later
this year?

Notwithstanding some $140 billion in advertized reserves — much of it invested in U.S.
Treasuries
— the Institute predicts that the latter scenario is the more likely to materialize,
with the
consequent, serious blowback in prospect for an already beleaguered Hong Kong. The
Wall
Street Journal editorial, while largely confirming this gloomy prognosis, holds out this one
bit of
hope: Western lenders and investors may, at long last, be getting serious about their
creditworthiness and due diligence assessments in China.

If so, it is to be earnestly hoped that they will start asking questions often not delineated in
prospectuses and other documentation — such as the true identity of the Chinese borrowers and
their senior management, to whom do they report and what is the real purpose of the loans?
Should they adopt this prudent approach, chances are that not only will investors and lenders be
spared serious loses in China, but the prospect averted of serious harm to U.S. national security
arising from American capital markets underwriting what amounts to an increasingly menacing
Chinese military-industrial complex.

¹ See the Casey Institute Perspective entitled
How Bill Clinton Proposes To Spend The
‘Surplus’: Bailing Out Foreign Governments – And Their Western Underwriters ( href=”index.jsp?section=papers&code=98-C_02″>No. 98-C 02,
7 January 1998).

¹ See Market Confidence In ‘China Inc.’
Appropriately Shaken — G.I.T.I.C. Bond Default A
Taste Of What Is To Come? (No. 98-C
177, 29 October 1998).

¹See Hedging Financial Bets In China: Will ‘ITIC’s’
And Other Entities With P.L.A.
Connections Be Bailed Out By Beijing? (No.
98-C 182, 12 November 1998).

Life Support for Castro Redux: Clinton Doesn’t Have Time for Blue-Ribbon Commission, Goes Direct to Gutting the Embargo

January 6, 1999Center for Security Policy

(Washington, D.C.): Until yesterday’s announcement by President Clinton that he was easing
the
economic sanctions against Fidel Castro’s regime, it appeared that proponents of this course of
action would have to content themselves with creating and awaiting the findings of a blue-ribbon,
“Bipartisan Commission on Cuba.” As the William J. Casey Institute noted in November 1998, ¹
this commission would have been a completely “wired” affair — designed to provide political
cover for an Administration anxious to effect the normalization of relations with Communist
Cuba.

Although the Commission’s advocates are making a fuss about the President’s avowed
rejection
of their proposal (a transparent sop to Cuban-Americans and others still opposed to Castro’s
tyranny and determined to bring it to an early end), ² the
reality is quite different: The Clinton
team has effectively dispensed with the need for such a time-consuming endeavor, moving
directly — if piecemeal — in the direction of providing life-support to Fidel’s regime.
One
unnamed senior official explained the Administration’s thinking in a quote in today’s
Washington
Post: “There is already a bipartisan consensus” supporting such policy liberalization.

The Camel’s Nose

Although Mr. Clinton evidently believes the time is ripe for undercutting the embargo against
the
Castro government — after all, at this juncture there are no looming elections that might be
swayed by blow-back over such a move — his Administration has decided for the moment to
adopt a salami-slicing approach. It has thus approved only an increase in the amount of
remittances U.S. sources may send to “family and friends” among the Cuban people. It has also
okayed increased interaction between the two nations in the form of mail service, flights, sporting
events, etc.

The party line, as expressed by Secretary of State Madeline Albright, is that such initiatives
will
“strengthen support for the Cuban people.” In fact, it is unclear that expanded financial
transfers and other such activities will actually improve the plight of Cuban citizens and
non-governmental organizations, of which there are precious few. Instead, it will have
the
effect of seriously — if gradually — undermining U.S. and what remains of
international —
support for the economic isolation of those imprisoning this captive nation.

A Bill of Particulars

Tragically, Cuba has done little — if anything — to earn the new benefits offered by President
Clinton. The indictment of Fidel’s outrageous behavior includes the following:

Cuba continues to serve as one of the primary conduits (via its airspace and sea lanes) for
South American drugs targeted for distribution in the United States. ³

Cuba (and, for that matter, Russia) continues to monitor sensitive commercial and
security-relevant communications along the East Coast and into the Midwest through massive,
technologically-advanced signals intelligence facilities located in Lourdes.
Such capabilities
also lend themselves to use in offensive information warfare activities. ⁴

There remain indications that Cuba has embarked on a potentially deadly effort to develop
biological weaponry and delivery systems. ⁵

Worse still, the misguided and inevitable effect of this policy easing will be to signal a
“green
light” to European and South and Central American governments — not to mention Canada — that
the bazar is now open in Cuba. Over the past few years, at least some of these nations have
behaved relatively cautiously vis a vis their embrace of this totalitarian state. In the wake of
yesterday’s announcement by President Clinton, however, it is predictable that the
floodgates
will start opening for foreign investment and projects spearheaded by foreign firms. We
can also anticipate an acceleration of Cuba’s largest creditors in the Paris Club to reschedule more
than $10 billion in defaulted hard currency debt. ⁶

Equally predictable is the effect: Such assistance will provide crucial life support to an
otherwise
destitute Cuban government. The notion that additional foreign assistance and investment — even
that provided ostensibly for humanitarian and individual family purposes — will elude Castro’s
stranglehold on every aspect of the Cuban economy is fatuous nonsense.

Especially frightening is the prospect that President Clinton’s evident determination to
“normalize” relations with Cuba will likely embolden prospective foreign suppliers to take more
seriously Havana’s and Moscow’s entreaties to fund the completion of two
irretrievably-flawed,
Soviet-era nuclear reactors near Juragua, Cuba. It is worth recalling that experts across
the
political spectrum — including those of the U.S. government — have concluded that, if these
reactors are brought on-line, it is a question of when, not if, a nuclear accident will
occur. If it
does, the result will be the release of a radioactive plume upwind from much of the U.S. mainland,
with some 50-80 million Americans expected to be exposed to potentially dangerous levels of
radiation. ⁷

Bottom Line

It adds insult to injury that the latest Clinton opening to Cuba, offering political legitimacy
and
economic life support to its despotic regime, comes at a time when Fidel’s exhausted
ideologies
and policies are on their last legs. This point is made trenchantly in a feature article by
Senate
Foreign Relations Committee Chairman Jesse Helms (R-NC) which appears — of all
places —
in the current issue of the Council of Foreign Relations’ Foreign Affairs Magazine:

⁸

Sen. Helms’s committee — and others on both sides of Capitol Hill responsible for U.S.
national security interests — must examine carefully what the President’s latest troubling foreign
policy initiative portends for democracy in Cuba and for American interests. If rigorously done,
such a review will show this action to have been premature and
counterproductive.

¹See the Casey Institute’s Perspective entitled
Life Support for Castro: New Commission on
Cuba, Paris Club ‘Rescheduling’ of Havana’s Defaulted Debt ( href=”index.jsp?section=papers&code=98-C_187″>No. 98-C 187, 18 November
1998).

²The crocodile tears being shed seem approximately as disingenuous
as the claim that one of
Castro’s most assiduous apologists and most tireless promoters of normalization with Cuba, State
Department Policy Planning Staff Director Morton Halperin, was not involved in the President’s
decision.

³ See the Center’s Press Release entitled
Secretary Cohen, Casey Institute Symposia Agree:
Castro’s Cuba Remains An Asymmetric Threat (No.
98-R 80, 7 May 1998).

⁴See Casey Institute Perspectives entitled
Guess Who Else Was Listening To Newt Gingrich’s
Phone Call — And To Those Of Millions Of Other Americans Every Day? ( href=”index.jsp?section=papers&code=97-C_09″>No. 97-C 9, 16
January 1997); and Asymmetric Threat: Defector Confirms Moscow’s Lourdes
Complex In
Cuba Compromised Sensitive Gulf War Battle Plans ( href=”index.jsp?section=papers&code=98-C_64″>No. 98-C 64, 10 April 1998).

⁵ See the Center’s Press Release entitled
Secretary Cohen, Casey Institute Symposia Agree:
Castro’s Cuba Remains An Asymmetric Threat (No.
98-R 80, 7 May 1998).

⁶See the Casey Institute’s Perspective entitled
Life Support for Castro: New Commission on
Cuba, Paris Club ‘Rescheduling’ of Havana’s Defaulted Debt ( href=”index.jsp?section=papers&code=98-C_187″>No. 98-C 187, 18 November
1998).

⁷ See Casey Institute Perspectives entitled
Will Moscow Be Allowed To Recreate In Cuba The
Nuclear Nightmare It Has Bequeathed To Bulgaria? ( href=”index.jsp?section=papers&code=97-C_01″>No. 97-C 1, 2 July 1997); ‘Show Me’:
The Allies Must Demonstrate Their Commitment To Changing Cuba By Halting The Cuban
‘Chernobyl-In-The-Making’ (No. 97-C 3, 6
January 1997); and Clinton Legacy Watch #19:
Will Gore-Chernomyrdin At Last Put A Halt To Russia’s Dangerous Nuclear Sales To Cuba,
Iran? (No. 98-D 40, 6 March 1998).

⁸ Sen. Helm’s extraordinary article, entitled “What Sanctions
Epidemic?” appears in the
January/February 1999 issue of Foreign Affairs.

The Real Case Against Bill Clinton: Chinese Bribery

January 4, 1999Frank Gaffney, Jr.

(Washington, D.C.): Not since Al Capone was prosecuted for tax evasion has there been a
more
bizarre judicial pursuit of criminal activity than President Clinton’s impending trial for misdeeds in
connection with the Lewinsky Affair. As with the notorious Chicago gangster, if truly despicable
behavior could be brought to an end with the successful prosecution of nothing more than charges
of presidential perjury and obstruction of justice, so be it.

In the matter of President Clinton’s impeachment, however, it appears that he may “walk,”
thanks
to what are seen by at least one-third of the U.S. Senate to be inadequate grounds for his removal
from office. This prospect demands that prosecutors from the House of Representatives be
allowed not only to call witnesses. They must be permitted to make a larger case: Mr.
Clinton
has engaged in a crime specifically cited in the Constitution as an impeachable offense —
bribery.

Year of the Rat

The evidence for such a case is already before the Senate. In fact, it is has been submitted to
the
American people over the past four months in the form of a best-selling book, Year of the
Rat, by
two veteran and highly respected congressional staffers — Ed Timperlake and
Bill Triplett.

Year of the Rat documents three of the four conditions required under the law for
the prosecution
of a bribery charge: 1) actus reus, a voluntary action involving the acceptance of at
least one
bribe; 2) menes rea, culpable intent; and 3) concurrence causation, the connections
between the
bribes and actions they engendered — in this case to the considerable detriment of the national
security.

The Bribes

With respect to the voluntary action, Timperlake and Triplett document the myriad
ways in
which Mr. Clinton’s 1992 and 1996 campaigns were the beneficiaries of “contributions” from
individuals and organizations associated with Chinese military/intelligence. These included: “a
massive cascade of illegally laundered foreign funds” injected into key states in the general
election of 1972; “a multimillion-dollar loan from an Arkansas bank under the…influence [of
Chinese agents]”; “Chinese agents became the number one donors” to the Clinton campaign in
1992; “leaders of a Thai conglomerate that is in business with…China’s biggest arms smugglers
had a White House meeting with Clinton at which they were illegally solicited for campaign
donations”; “a People’s Liberation Army partner sat next to Clinton at a Democratic National
Committee fund-raiser and contributed thousands of dollars in illegal campaign funds to the
Democrats”; and “the officers of an American defense contractor in business with China’s missile
builders became the number one contributors” to the President’s reelection campaign in
1995-1996.”

Intent

Under the law, culpable intent can be established if the suspect has engaged in “reckless
endangerment.” This test is amply satisfied by the President’s surrounding himself with
individuals with ties to Beijing. These include his decades-long friendship with
Mochtar and
James Riady and with Charlie Trie. The former run a
Chinese-Indonesian empire which
funneled at least a million into Clinton and Democratic coffers in 1992. According to Messrs.
Timperlake and Triplett, the latter is a member of the Chinese “Four Seas” Triad gang. At the
very least, he behaved in a gangster-like fashion when, on 21 March 1996, he delivered nearly
simultaneously $460,000 to the President’s legal defense fund and a written demand that the U.S.
not interfere in China’s campaign of intimidation against Taiwan.

There are, as well, a gaggle of relative newcomers like: John Huang (a
Chinese expat and Riady
employee for whom Mr. Clinton secured a Top Secret clearance and senior position in the
Commerce Department); Johnny Chung (a struggling California businessman
whose more than
$350,000 in contributions to the DNC were believed to have come from foreign sources); and his
associate and apparent paymaster Liu Chaoying (a Lieutenant Colonel in the
PLA, alumna of its
spy school and daughter of the PLA’s former senior officer, General Liu Huaquing).

It is equally damning whether Mr. Clinton knew about and chose to ignore these
individuals’ connections to the PRC or was so indifferent to the danger they represented as
to seek no information about their troubling ties.

The Consequences

Then, there is the matter of what the Chinese appear to have gotten
for their bribes. The
transactions appear to fall into three categories: First, the Clinton Administration actively
appeased China. For example, there was Clinton’s explicit embrace last year of
the Chinese
position on Taiwan; his repeated, personal intervention to secure the former U.S. Navy base at
Long Beach for COSCO — Beijing’s package express service of choice for arms- smuggling,
drug-running, etc.; and his fomenting of ill-advised U.S.-PRC military-to-military ties.

Second, the Administration’s has deliberately failed to enforce anti-proliferation
laws —
including, incredibly, one named for Vice President Al Gore. Pursuant to the Gore-McCain Act,
Chinese sales of advanced cruise missiles to Iran (that may well be used to execute deadly attacks
against American naval vessels in a future conflict in the Persian Gulf) should have resulted in
sanctions against the PRC. Mr. Clinton finessed this legal requirement by ignoring, suborning and
misrepresenting the relevant intelligence. Under U.S. statutes, Chinese sales of nuclear
technology to Pakistan and Iran should also have triggered retaliatory measures.

Third, the Clinton team rewarded Beijing with a variety of initiatives that have enormously
abetted China’s longstanding efforts to secure military and dual-use
technology. The
indictment in this area includes: the Administration’s dismantling of the U.S. and international
export control regime, the assistance it permitted American aerospace firms to provide the
Chinese military space program; and access to advanced supercomputers, machine tools, jet
engine technology, etc.

The Cox Committee’s Finding

The fourth element necessary for a successful bribery prosecution has only become
available after the House voted to impeach President Clinton. On 30
December a bipartisan
select committee empaneled to look into the last of these areas unanimously concluded, according
to its chairman, Rep. Chris Cox (Republican of California), that real “harm has been caused” by
the sorts of policies governing Chinese access to U.S. technology embraced by Mr. Clinton.

Unfortunately, the Cox committee’s 700 pages of documentation of this harm is classified at
this
juncture — and will remain so until such time as the Clinton Administration sees fit to “sanitize” a
version that could be published for general consumption. If past experience is any guide, the
Clinton team should not be expected to cooperate in building the public case for the President’s
removal from office.

The Bottom Line

In short, the Senate must have a full-fledged trial to examine whether President Clinton has
engaged in “high crimes and misdemeanors.” The Senate will immeasurably compound the
damage Mr. Clinton has done to the national interest and security as a result of his bribery by
China if it refuses to seek testimony and act upon this most patently impeachable of crimes.

Will China’s latest Bond Offering Penetrate U.S. Markets, Institutional Portfolios Through A ‘Backdoor’?

December 1, 1998Center for Security Policy

(Washington, D.C.): Despite lingering investor anxieties regarding global emerging markets
and
the recent default of one of China’s largest International Trust and Investment Corporations (i.e.
Guangdong ITIC),⁽¹⁾ the People’s Republic of China is
expected to announce today the sale of a
general-purpose bond in the amount of $1 billion. This so-called “Yankee” bond will be issued on
the Luxembourg and Hong Kong Stock Exchanges at slightly less than three percentage points
above the 10-year U.S. Treasury Note and will be co-led by prominent Swiss and American
investment banks. The U.S. Treasury market has reportedly reacted to the “road show” designed
to market the offering with “mixed reviews,” according to one financial journalist. For those, like
the William J. Casey Institute, concerned with both the financial and national security
implications
of such a transaction, a careful look is in order.

Although it appears that the underwriters of this latest Chinese offering are deliberately
avoiding
bringing the bond to market in New York, subscribers may end up including U.S. pension and
mutual funds, insurance companies, corporations and other American entities due to a “backdoor”
provided under the regulations of the Securities and Exchange Commission (SEC). Rule 144A
allows foreign borrowers to market issues to “Qualified Institutional Buyers (QIB’s)” — i.e.,
institutions with over $100 million invested in the capital markets — without the
kind of scrutiny
that such an offering would receive if issued in the United States. It also allows
the offering to
be concluded in a relatively short time frame.

Did Wall Street and China Break The Code?

Between October 1993 and December 1997, the People’s Republic of China, borrowing under
its
own name, issued seven dollar-denominated bonds totaling about $3.2 billion in the U.S. capital
markets. During that same time period, the PRC also tapped into other
international markets
(e.g., yen- and DM-denominated bonds) on five occasions, but for only roughly $1.3 billion.

The relatively large proportion of Chinese bond issues in U.S. capital markets is not
particularly
surprising, given the global dominance of these American markets and Beijing’s need to access
them if it is to meet its large-scale money needs over time. It does raise a question as to why the
Chinese government and their U.S.-based underwriters have decided to issue the upcoming bond
in two foreign markets (and, arguably, second-tier ones at that), rather than in New
York.

The explanation may be that China and its advisors on Wall Street are doing so in
response to
the experience of a controversial foreign bond offering in the U.S. market last year. In late
October-early November 1997, a $3 billion bond offering by Gazprom, the giant state-owned
Russian natural gas monopoly, was unceremoniously withdrawn. It had become a
focus of controversy in light of congressional concerns about Gazprom’s violation of the
Iran-Libya Sanctions Act by dint of that firm’s participation in a large offshore energy project in
Iran.
In fact, in the course of tough hearings in the Senate Banking Committee, economic retaliation
against Gazprom was threatened, chilling the market’s appetite for the Russian monopoly’s
paper.⁽²⁾

In short, for the first time in memory, a foreign bond offering in the U.S. capital
markets
was derailed for primarily national security reasons. In light of this experience, and the
distinct possibility that a China engaged in political repression at home, the proliferation of
weapons of mass destruction and a threatening military build-up could inspire similar reactions to
its bond offerings, the PRC and its underwriters may have concluded that it would be safer to
enter the U.S. market through foreign markets — via the 144A “backdoor” — than to risk coming
through the higher-profile “front door” in New York.

Why Luxembourg and Hong Kong?

Pursuant to the U.S. Securities Exchange Act of 1933, the SEC requires a high degree of
disclosure and transparency regarding bonds underwritten by U.S. firms and offered in New York.
In order to circumvent some of this burdensome scrutiny, a foreign government may choose to
offer its paper to large U.S. portfolios and funds through two loopholes governing bonds offered
“off-shore”: “Regulation S” and “Rule 144A.”⁽³⁾

Ironically, these “safe harbor” mechanisms were originally designed to protect
individual
investors from less-than-transparent overseas bonds. In practice, however, these arrangements
make it possible for an unscrupulous foreign entity to register its offering overseas and then
market its bonds to Qualified Institutional Buyers through a U.S. holding company.
In the case
of the current Chinese offering, the designated holding company is the Depository Trust Company
of New York.

In contrast with SEC procedures, Luxembourg — where the latest Chinese bond was first
registered — requires, according to one Wall Street insider, “form over substance.” As a result,
China has not been obliged to provide as much information about its activities and
creditworthiness as well as the intended use of the funds. Once the bond offering is successfully
sold to QIB’s through the holding and clearing companies in New York and Europe, the bond will
be officially listed on a foreign stock exchange (in this case, the Hang Seng).

Should China succeed in implementing such a strategy, the PRC and its underwriters will have
achieved the best of both worlds: They will secure funds from many of the same American
investors who would have purchased the Chinese bonds had they been offered in the U.S., while
avoiding full disclosure with respect to the specific offering, the foreign government borrower and
the end-use of the funds. In particular, through this “backdoor” Beijing can: 1) avoid having to
comply with arduous SEC rules regarding listing requirements; 2) bypass a possibly extended
“due diligence” process; and 3) minimize exposure to the sort of controversy and potential
Congressional action that sank the Gazprom offering in 1997. href=”#N_4_”>⁽⁴⁾ It is predictable that such a
maneuver will likely become the favored path of Wall Street firms advising hard currency-seeking
foreign governments and the entities they control.

What’s Wrong With General Purpose Chinese Bonds?

Although not all Chinese bonds should be considered risks due to financial, national
security-related or other concerns when listed off-shore (i.e., outside the purview of the SEC), as
a general
rule these instruments require close scrutiny for a number of reasons. These include the
following:

Sovereign Chinese bonds of the type coming to market are general purpose in nature,
meaning
that Americans have little, if any, specific information concerning where the cash proceeds
raised from bond offerings are going and how they will be used. While the relative
efficiency
and cost-effectiveness of this means of borrowing makes it attractive for a foreign
government like China, the lack of discipline and transparency makes it problematic for
the West.

Indeed, general purpose (also known as “balance of payments”) loans by Western
governments and other lenders to sovereign borrowers have contributed to
creditworthiness problems down the road (e.g. Russia and other emerging market
economies). This has been true, in part, due to the fact that lenders did not ensure that
loan proceeds were used for productive purposes (such as fostering export-oriented or
import-substituting projects and industries which might have generated the hard
currency cash flow — or savings — required to repay the loans). Worse yet, from a
national security perspective, such bond proceeds could be more easily diverted to
purposes inimical to U.S. security interests, a problem compounded by the inherent
fungibility of money.

Foreign government bonds cannot be “rescheduled” with nearly the same ease as, for
example,
traditional commercial bank loans. If China were to experience a liquidity crisis (or
worse)
in the future, it would be nearly impossible to locate all of the holders of Chinese bonds
for the purposes of rescheduling or restructuring the country’s debt, href=”#N_5_”>⁽⁵⁾ as a large
secondary market for such bonds exists. These end up being purchased by institutions and
individuals worldwide.⁽⁶⁾

Also, unlike loans from Western governments and commercial banks, by borrowing via bond
offerings, Beijing is able to recruit a wide spectrum of American financial entities as
lenders to China (e.g. pension and mutual funds, insurance companies, corporations,
leasing
firms and even individuals). Beijing is, no doubt, mindful of the fact that this form of
borrowing in the U.S. and elsewhere in the West creates a vested financial interest on
the part of lenders and investors, for example, to oppose future economic sanctions or
other penalties associated with proliferation activities, human rights abuses, environmental
degradation and other misdeeds. By expanding substantially the American holders of Chinese
paper, such transactions could facilitate even greater PRC influence in the halls of Congress
and the Executive Branch.

The National Security Dimensions

Over the past two years, Chinese — and Russian — bond offerings have increasingly become a
source of concern to some in the U.S. security community as well as to key members and
Committees on Capitol Hill. The following are among the grounds for such concern:

Some $800 million in dollar-denominated bonds have thus far been issued
(primarily in
the U.S.) by China International Trust and Investment Corporation (CITIC), headed by
China’s most notorious arms dealer, Wang Jun. Wang can no longer obtain a visa to
enter
the United States due to allegations that he was involved in efforts to smuggle (via a subsidiary
of the PLA- and CITIC-affiliated company, Poly Technologies) roughly 2000 AK-47’s to West
Coast street gangs. There are reports that CITIC, which is a $23 billion Beijing
government-controlled entity, does not report — as advertized in past bond prospectuses — to
China’s State
Council, but rather to that nation’s Military Commission. href=”#N_7_”>⁽⁷⁾

Another potentially problematic issuer of international bonds is the Bank of China,
which has sold $2.3 billion of its dollar-denominated paper since 1985, primarily to U.S.
investors. The bank has been implicated in the U.S. campaign finance scandal for
executing
electronic money transfers to both Johnny Chun and Charlie Trie. According to Insight
Magazine, the Bank of China is suspected of involvement in “information-gathering” (read
intelligence collection) that has reportedly contributed to long delays in its efforts to open a
branch office in the San Francisco area.

The People’s Republic of China is the largest Chinese borrower of dollars in the
United
States, with some $3.2 billion in sovereign bond offerings. As Roger Robinson, former
Senior Director of International Economics at the Reagan National Security Council and Casey
Chair, put it in testimony before the Senate Banking Subcommittee on Financial Institutions on
5 November 1997: “Hopefully, a portion of these funds did not find their way to help fund the
new DF-31 mobile ICBM, the new JL-2 submarine launched ICBM or other sophisticated,
world-class military systems which will be targeted at the United States and our assets
overseas.”⁽⁸⁾

Geopolitical Backdrop of the Newest PRC Bond

Despite assertions by the Clinton Administration and Beijing’s supporters in the U.S. private
sector to the effect that China is successfully cooperating on a number of fronts to ease bilateral
tensions, the past few weeks have amply demonstrated the need for continued U.S. vigilance and
monitoring of undisciplined Western borrowings. Consider the
following:

China is currently in the midst of a renewed period of
political repression. A fledgling
opposition group, the China Democracy Party, has been forcibly suppressed by the wholesale
arrests of its members. The government has announced plans to try one of the Democracy
Party’s leaders for “subversion” next week, virtually ensuring that he will soon be sentenced to
a lengthy prison term.

According to the Washington Times’ National Security Correspondent Bill
Gertz’s front-page
report of 9 December, China has defaulted on its promised crack-down on dangerous
proliferation activities. The article states, “China last month delivered a new shipment of
missile technology to Iran…The transfer included telemetry equipment that could be
used in the testing of medium-range missiles, such as Iran’s new Shahab-3.” This
shipment follows a transfer last year of an entire “telemetry infrastructure,” which gave Iran the
capability to test the Shahab-3 last March. Both shipments violate a pledge China made to
abide by the Missile Technology Control Regime.

A front page article in the New York Times today indicate that a
classified Pentagon report
completed on 7 December found that Hughes Space and Communications “gave China
technological insights that are crucial to the successful launching s of satellites and
ballistic missiles.” This scandal would be further exacerbated if, as reported by the
Washington Post and New York Times on 5 December, CIA
officials tipped off Hughes
Electronics Corporation to the fact that company officials were going to be called before the
Senate Intelligence Committee which was investigating the transfer of sensitive, militarily-relevant
technology to China.⁽⁹⁾

Bottom Line

The Casey Institute has long argued for greater disclosure and surveillance with respect to
foreign
government bond offerings marketed to U.S. investors (institutional or otherwise) — particularly
by Russia and China. This is not an argument for capital controls or other such
disruptive
measures. In the case of China, as Mr. Robinson stated in testimony before a Senate
Banking
Subcommittee on 5 November 1997,

greater security-related
disclosure and screening is urgently required if we are to build a more
cooperative and sustainable bilateral relationship with China.”

Such “security-related disclosure” would be advanced by the following steps:

The reintroduction and adoption of S.1315, “The U.S. Markets Security Act of
1997″ —
a measure that would, for the first time, create an Office of National Security at the SEC
mandated to help strengthen reporting requirements with respect to foreign
government-controlled entities.⁽¹⁰⁾

Modification of SEC Rule 144A to better protect U.S. institutional and other
investors
from less-than-transparent foreign government bond offerings in overseas markets.

Encouraging specific-purpose bond offerings and other foreign-government
borrowings
so that U.S. investors/lenders know precisely where their money is going and how it is being
used (not to mention the obvious merits of disciplined lending practices and reduced prospects
for serious losses).

Calling for more complete prospectuses — particularly with regard to
foreign governments
engaged in activities harmful to U.S. security interests.

These sensible measures, consistent with the free flow of global capital, would help avoid
unwanted surprises for underwriters and provide clearer “rules of the road” for foreign
government borrowers. The ultimate beneficiaries of these achievable modifications would be the
U.S. investor community and the Nation’s security interests.

– 30 –

1. See the Casey Institute’s Perspectives entitled
Hedging Financial Bets In China: Will
‘ITIC’s’ And Other Entities With P.L.A. Connections Be Bailed Out By Beijing?
(No. 98-C
182, 12 November 1998) and Market Confidence in ‘China Inc.’ Appropriately
Shaken —
G.I.T.I.C. Bond Default: A Taste Of What Is To Come? ( href=”index.jsp?section=papers&code=98-C_177″>No. 98-C 177, 29 October 1998).

2. See Russian Bonds Rocked By Second Senate
Hearing In A Week Focusing On
Undesirable Foreign Penetration Of U.S. Markets ( href=”index.jsp?section=papers&code=97-C_169″>No. 97-C 169, 10 November 1997).

3. Regulation S allows non-U.S. investors to purchase the bonds
underwritten by U.S. investment
houses. Rule 144A allows QIB’s to purchase bonds listed on overseas exchanges.

4. Ironically, these “safe harbors” have loopholes of their own.
Specifically, after roughly 40
days, QIB’s are allowed to trade their bonds for seasoned “global notes.” These global notes may
then be sold to individual consumers. Put simply, in less than two months after the initial offering,
the individuals and entities 144A and Regulation S were designed to protect can and do purchase
paper which has not fulfilled all SEC disclosure requirements.

5. This problem was brought home by the Russian government’s
recent default on its GKO
financial instruments.

6. A principal bottleneck in Russia’s debt rescheduling efforts today is
the result of Moscow
having shifted its borrowing patterns over the past several years — both domestically and
internationally — in favor of often-lower-priced bond offerings.

7. See the Center’s William J. Casey Institute
Perspective entitled, Dangerous Upshot of
Clinton-Gore’s China ‘Bonding’: Strategic Penetration of U.S. Investment
Portfolios (No.
97-C 47, 1 April 1997), the Casey Institute’s Press Releases entitled
Insight Magazine Breaks
the Code: Chinese Penetration of U.S., Global Financial Markets Has Strategic
Implications
(No. 97-R 60, 3 May 1997), USA Today
Illuminates Case For Urgent Action To Halt Chinese
‘Bondage’ (No. 97-R 68, 16 May 1997) and
The Dog That Didn’t Bark: Moody’s, Et.Al. Fail
Investors In Asian Markets, Miss Warning Signs In China And Russia ( href=”index.jsp?section=papers&code=97-C_200″>No. 97-C 200, 23
December 1997).

8. Please see Roger W. Robinson, Jr.’s 5 November 1997 testimony before
the Senate Banking Subcommittee on Financial Institutions.

9. Although this controversy involves alleged security-related abuses
by U.S. space and
communications companies, it, nonetheless, highlights the fact that China is continuing to pursue a
robust strategic modernization effort.

10. See Sen. D’Amato’s Committee Serves Notice On
Those Who Aid And Abet U.S.
Adversaries: No Fund-Raising On American Markets ( href=”index.jsp?section=papers&code=97-C_161″>No. 97-C 161, 30 October 1997).

Life Support for Castro: New Commission on Cuba,
Paris Club ‘Rescheduling’ of Havana’s Defaulted Debt

November 18, 1998Center for Security Policy

(Washington, D.C.): With the mid-term election an accomplished fact, the “usual suspects”
are
resuming one of the hardiest perennials of what passes for President Clinton’s foreign policy
agenda: the effort to normalize relations with communist Cuba.

In recent days, proponents of ending the economic embargo against Fidel Castro’s regime
have
opened a two-front campaign:

A Stacked-Deck ‘Commission’: One track involves the creation of a
so-called National
Bipartisan Commission on Cuba. In keeping with the increasingly common practice of fobbing
intractable public policy problems off onto independent, “bipartisan” entities, its champions
claim that such a Commission would be able to provide an objective assessment of the
effectiveness of America’s present policy toward Cuba and offer suggestions for altering it
where necessary.

Debt-Relief for Castro: The Paris Club is reportedly considering
rescheduling more than $10
billion in Cuban hard currency debt. According to a 17 November Financial Times
article
entitled “Cuba Edges Toward Paris Club Accord,” momentum is building to overlook Cuba’s
non-payment over more than a decade of some $10-14 billion owed to Western governments
and private firms (i.e. payments ceased in 1986) and to in effect make Havana’s debt profile
current.

Cuba’s largest Western creditors are France, Argentina, Japan, Spain
and Belgium

as soon as next month

A Natty Little Problem: Cuba Still Represents a Clear if
Asymmetric Threat

American advocates of normalization usually contend that Cuba no longer poses any threat to
the
United States and that the U.S. embargo is, therefore, basically an obsolete and harmful relic of
the Cold War. Unfortunately, this view — as is typically true of the philosophy of trade uber
alles
— ignores the abiding, menacing character of the Castro regime. This is all the more remarkable
given the emphasis Secretary of Defense William Cohen (among other Clinton Administration
officials) have placed on asymmetric threats — the very sorts of threats Cuba
continues to pose to
American citizens and interests.⁽¹⁾ These include the
following:

Information and Intelligence Warfare

Thanks to the vast signal intelligence facilities operated near Lourdes, Cuba by Havana’s
and Moscow’s intelligence services — facilities that permit the wholesale collection of
sensitive
U.S. military, diplomatic and commercial data and the invasion of millions of Americans’
privacy — the Cuban regime has the capability to conduct sustained and systematic
Information
Warfare (IW) against the United States.

A stunning example of the potentially devastating consequences of this capability was recently
provided by former GRU Colonel Stanislav Lunev. As one of the most senior
Soviet/Russian
military intelligence officials to come to this country, Lunev revealed that in 1990 the Soviet
Union acquired America’s most sensitive Desert Storm battle plans, including General Norman
Schwartzkopf’s famed “Hail Mary” flanking maneuver, prior to the launch of the U.S. ground war
in the Persian Gulf. Moscow’s penetration of such closely-guarded American military planning —
via its Cuban ally — may have jeopardized the lives of literally thousands of U.S. troops in the
event the intelligence had been forwarded to Saddam Hussein.

What is more, Russia may have recently learned in the same way about the
particulars of
U.S. plans to strike Iraqi targets last weekend. Given the close relationship between
Russian
Prime Minister Yevgeny Primakov and Saddam Hussein (the former served for years as the
latter’s KGB case officer), the apparent compromise of that operation may have occurred when
sensitive intelligence collected by the Lourdes sigint facilities was turned over to Baghdad. And,
had President Clinton not aborted the mission, this compromise may well have reduced its
effectiveness and sacrificed American service personnel.⁽²⁾

Cuban Chernobyl-Equivalent

Castro is also pursuing what amounts to a nuclear
catastrophe-in-the-making for as
many as 50 to 80 million Americans, according to the General Accounting Office and other
official sources. Due to design, construction and other irretrievable flaws, the two reactors that
have long been under construction near Juragua, Cuba — 180 miles upwind from the American
mainland — will almost certainly be subject to a major accident if allowed to come on-line.
According to the National Oceanographic and Atmospheric Administration, depending upon the
prevailing winds at the time of such a Chernobyl-like disaster, areas as far north as Washington,
D.C. and as far west as Texas could fall under the resulting radioactive plume. href=”#N_3_”>⁽³⁾

Facilitating the Drug Trade

The Cuban regime no longer enjoys the multi-billion dollar annual subsidies from
Moscow
that once enabled it to serve as the USSR’s Foreign Legion in Africa and as a proxy for the
Kremlin in the subversion of democratic and other, pro-Western governments throughout this
hemisphere. The loss of this revenue stream has been offset somewhat by Havana’s
narco-trafficking under the protection and with the assistance of the Cuban military.
The
gravity of this danger for the United States was explained in a letter sent by
Representatives
Lincoln Diaz-Balart (R-FL), Dan Burton (R-IN) and Ileana
Ros-Lehtinen (R-FL) to Gen.
Barry McCaffrey, President Clinton’s Director of the Office of Drug Control Policy, on
18
November 1996. It states, in part:

Biological Weapons

In remarks made earlier this year at a Casey Institute Symposium on “Vital U.S.
Security
Interests in Cuba” in Palm Beach, Florida, Rep. Diaz-Balart expressed concern that Cuba
is
pursuing an ominous biological weapons program href=”#N_4_”>⁽⁴⁾:

The Bottom Line

The United States cannot afford to ignore the abiding — and, in some areas, increasing —
threat
posed by Cuba to the United States. Make no mistake about it, as long as Castro remains in
power, American citizens and interests will continue to be at risk from such asymmetric threats.

No less troubling than the willingness of some to discount this reality is the naivete of those
who
believe that “engagement” with Communist dictators — involving intensified commercial relations
and “people to people” contacts — will transform those regimes. In fact, such steps
would have
perpetuated the Soviet Union. Today, they are propping up, if not actually
strengthening,
potentially hostile governments in places like Beijing, Pyongyang and Hanoi.

The United States must not permit the multilateral rescheduling of long-defaulted
Cuban
debt since such a step will, by design, immediately and officially open the floodgates to new
investment and credit flows to the Castro regime. Prior to the Paris Club sessions on
this
subject (expected to be held next month), the Congress should insist that the U.S. exercise its
effective veto of this sort of life-support gambit. Moreover, those allied capitals that have already
agreed to bilateral reschedulings of Cuba debt — or are contemplating such a move —
should be
put on notice by the Congress that there may be repercussions for the banks and governments
involved.

Finally, if the so-called National Bipartisan Commission on Cuba is going to
proceed, its
membership should be comprised equally of individuals who favor the present policy and
those who wish to see it changed so as to permit the merits of policy options to be
vetted in a
thorough, balanced and non-pre-determined way.

– 30 –

1. See the Casey Institute’s Perspective entitled
Secretary Cohen, Casey Institute Symposia
Agree: Castro’s Cuba Remains and Asymmetric Threat ( href=”index.jsp?section=papers&code=98-R_80″>No. 98-R 80, 7 May 1998).

2. Congressional hearings into the apparently compromised
operational security of the U.S.
operation last weekend should be an early priority for the 106^th Congress. See
Will Clinton Just
Pay Lip-Service to the ‘Liberation’ of Iraq — Or Will He Take Concerted Action to Achieve
It? (No. 98-D 185, 16 November 1998).

3. For more information on this subject see the following Casey
Institute Perspectives entitled
Castro’s Cuba: A Classic Asymmetric Threat ( href=”index.jsp?section=papers&code=98-C_59″>No. 98-C 59, 3 April 1998) and One Step
Forward, Two Back on U.S. Vulnerability: Clinton Announces Defenses, Limits Their Effect
— Perhaps Fatally (No. 97-C 91, 27 May 1998).

4. See the Casey Institute’s Perspective entitled
Secretary Cohen, Casey Institute Symposia
Agree: Castro’s Cuba Remains and Asymmetric Threat ( href=”index.jsp?section=papers&code=98-R_80″>No. 98-R 80, 7 May 1998).

Hedging Financial Bets In China: Will ‘ITIC’s’ And Other Entities With P.L.A. Connections Be Bailed Out By Beijing?

November 12, 1998Center for Security Policy

(Washington, D.C.): The Chinese government — wracked with a potentially serious liquidity
crises afflicting its roughly 240 International Trade and Investment Corporations (known as
ITICs) — subtly effected a major policy reversal last week. Officials indicated that
some of the
country’s ITIC’s may be bailed out in the weeks and months ahead. While investors
anxiously
await word whether the Guandong International Trust and Investment Corporation (GITIC) will
be one of those, an ominous prospect looms: GITIC and other provincial ITIC’s may
well be
permitted to fail, but Beijing will probably not allow national ITICs and
other entities with
direct or indirect ties to China’s vast military- industrial complex (the People’s Liberation
Army or PLA) and intelligence services to default — or even to be subjected to increased
scrutiny.

The Casey Institute has long argued that China’s penchant for secrecy and non-transparency in
its
international financial dealings mirrors the crony capitalism that have brought such grief to
economies throughout East Asia. If Beijing now uses PLA-affiliation as the determinant of which
failing ITICs are eligible for central government intervention, there are likely to be significant
national security, as well as financial, implications for U.S. and other Western investors.

No ITIC Bailouts?

Over the past two weeks, foreign banks and investors have been sweating the details of
GITIC’s
closure in the wake of the central governments’s announcement that foreign debt obligations may
not be met in full. Having committed billions of dollars (often through ITICs) to
China’s development efforts over the past decade, confident that the PRC would never let such
organizations fail, Wall Street received a double shock: Not only would GITIC cease operations;
a formal announcement followed that there would be no government bailouts for the
ITICs.
Instead, as the Financial Times reported on 30 October:

“Foreign banks, which have been told they cannot expect the central government to bail them
out
of loans with bankrupt provincial investment companies, will ultimately have to negotiate
repayment with the Guandong provincial government, which owned and ran GITIC.”

Clintonesque Wordsmithing

China appears to be taking a page from President Clinton’s playbook in trying to have it both
ways: It seeks to permit mismanaged and over-extended state-owned enterprises to fail while
trying to preserve market confidence in China as a whole. The answer: Fob responsibility off
onto provincial authorities and their foreign creditors.

In this connection, China’s Finance Minister, Xiang Huaicheng, recently declared: “I do not
know how [the province of Guandong] will handle GITIC’s bankruptcy. In terms of foreign debt,
this issue should be handled according to Chinese laws and regulations.” Unfortunately, as the 30
October Financial Times article on the GITIC default points out, Mr. Xiang’s logic
leads the
hapless Western investor or creditor to a dead-end: “The legal process, though, is unclear.
Foreign banks are required to register claims for loans to GITIC with full documentation, but in
many cases the documentary evidence is lacking. On some loans, banks have failed to
do the
necessary paperwork; on other short-terms loans,
registration was not generally required.“
(Emphasis added.)

It fell to Wang Xuebing, President of the Bank of China — one of China’s “big four”
government
banks tasked with overseeing GITIC’s closure — to make plain the bottom line for foreign
creditors: “Foreign financial institutions should also bear the responsibility in this area.
Foreigners should take some responsibilities and should learn some lessons.” (Emphasis
added.)

Whoops, Did We Say No Bailouts?

To the dismay of the Beijing regime, foreign banks and financial
institutions took Wang’s advice
to heart and quickly sought to protect their now-vulnerable interests. As reported by the Casey
Institute on 29 October 1998,⁽¹⁾ Western bankers and
investors, fearful of further losses, reacted
with a two-pronged response to China’s GITIC announcement: 1) they turned off the valve to
new financial flows to the provincial ITICs and 2) canceled critical “rollovers” of debt repayments
to such institutions coming due, in order to reduce their credit exposure.

The immediate effect of GITIC’s default on a Merrill Lynch bond repayment was to create a
liquidity squeeze in parts of China more quickly than anticipated by Beijing. This knee-jerk
reaction by foreign creditors — still licking their wounds from the meltdown in the global
emerging markets — appears to be causing a financial train wreck among certain other Chinese
ITIC’s struggling to service their hard currency debt. The result could be a series of ITIC
financial problems which could damage China’s standing in international markets.

Realizing belatedly the debilitating consequences of such a financial undertow, China sought
to
soothe frayed nerves on Wall Street with a course-correction late last week. At a meeting of
Hong Kong bankers, Dai Xianglong, China’s central bank governor, announced a policy shift,
stating, “[Troubled ITIC’s] will be merged, reorganized and some may be
injected with
capital.” (Emphasis added).

China’s “Consolidation” Roadmap?

Although it is too early to identify which of China’s ITIC’s will be deemed worthy of receiving
such “capital injections” from the central government, the Casey
Institute suspects a pattern may
emerge over the course of the next 12 to 24 months:

First, China will likely permit troubled provincial (e.g., local) ITIC’s to “merge” or
collapse altogether. This would serve the dual objectives of demonstrating financial
“prudence” to international lenders while sparing Beijing billions of dollars in unaffordable
capital expenditures. The Chinese can safely expect the international markets quickly to adjust
to the new reality that some of these local ITIC’s will be permitted to go under —
without
unduly undermining investor confidence in China’s sovereign creditworthiness.

The second prong of this “consolidation” policy will probably involve not allowing
national ITIC’s (e.g., China International Trust and Investment Corporation or CITIC),
to
fail. Put simply, these national financial conduits provide China with too many legitimate —
and “off-the-books” — benefits to hold back government bailouts (i.e., making Western funds
available to critical, militarily-relevant projects throughout China, serving as market indicators
of China’s economic stability and financial solvency, providing access to sophisticated Western
technologies, etc.) in the event of prospective liquidity crises. By intervening to save these
entities, such sensitive operations would be spared the close scrutiny that would likely follow
missed foreign debt repayments.

The third and final component of China’s future bankruptcy/corporate consolidation policy
will
likely be to merge surviving provincial ITIC’s and channel Western credit and
investment flows into either these merged entities — or, better yet from Beijing’s
viewpoint, the national ITIC’s and banks (like CITIC and Bank of China).
Western
investors and creditors would likely be given assurances, or at least “a-wink-and-a-nod,” by the
regime that these categories of enterprises will be eligible for “capital injections” should they
encounter financial difficulties.

The danger is that this seemingly “responsible” Chinese response to the present ITIC
problems would greatly increase the “moral hazard” associated with Western investments in the
PRC. Through such a system of incentives, Beijing would effectively be able to vector more
Western financing and investment to Chinese entities most likely to be involved (at least
part-time) in military-related procurement and intelligence-gathering activities. href=”#N_2_”>⁽²⁾

Bottom Line

As China seeks to manage the solvency problems of its network of ITIC’s, it is important to
avoid
the aforementioned scenario of Wall Street and other Western creditors and investors being left
with the stark choice of either investing safely in national ITIC’s and banks — some of which are
associated with China’s Military Commission and/or intelligence services — or investing in local,
genuinely commercial enterprises at the risk of unrecoverable losses.

One achievable way to help ensure that American investors and creditors are not drawn into
(via
Chinese bail-out incentives) ever-larger commitments to the wrong sorts of “national” ITIC’s,
banks and enterprises would be for the newly elected Congress to enact legislation introduced in
the 105^th: S.1315, “The U.S. Markets Security Act of 1997.” This bill would
strengthen
reporting and disclosure requirements with respect to all foreign government-controlled entities
seeking to enter the U.S. debt and equity markets as well as establish an Office of National
Security at the Securities and Exchange Commission to facilitate this enhanced surveillance and
transparency. Failure to take this non-disruptive, prudent step will increase substantially the
prospect of new, unwelcome surprises for Wall Street and other market players in the period
ahead.

– 30 –

1. See the Casey Institute’s Perspective entitled
Market Confidence In ‘China Inc.’
Appropriately Shaken — G.I.T.I.C. Bond Default A Taste Of What Is To Come?
(No.98-C
177, 29 October 1998).

2. The Casey Institute has long argued that at least one national
Chinese ITIC, Chinese
International Trust and Investment Corporation (CITIC) has, at minimum, indirect links to
China’s Military Commission. Wang Jun, CITIC’s Chairman, is not eligible for a visa to enter the
United States stemming from allegations of gun-smuggling to West Coast street gangs via an
associated company of CITIC, Poly Technologies, which Wang Jun also chairs. Since it’s entry
into the U.S. capital markets in March 1993, CITIC has raised some $800 million. Overall,
CITIC has raised a total of some $3.6 billion in global capital markets since 1980. The Bank of
China has been caught up in the current campaign-finance scandal in Washington after it was
learned that the bank was the conduit for money transfers for Charlie Trie, who has been indicted
by federal prosecutors, and Johnny Chung, who has pleaded guilty to campaign finance-related
violations. Since entering the U.S. capital markets in 1985, Bank of China has raised roughly $2
billion. Interestingly, Morgan Stanley was the lead manager in three Bank of China offerings
totaling some $800 million.