Republicans in Congress are calling for creation of a watchdog committee within the Securities and Exchange Commission to scrutinize foreign stock listings to ensure they adhere to the standards of U.S. law, and to make it more difficult for foreign governments — in particular, China and Russia — to tap into domestic capital markets.
The new National Security Office, if approved, would search for and identify irregularities and manipulations of foreign stock and be required to make regular reports to Congress on borrowing by foreign government entities.
Such an agency is needed “to make sure no entity can engineer fluctuations that could bring our markets down,” said Rep. Gerald Solomon, R-NY, chairman of the House Rules Committee, in testimony Wednesday at a hearing convened by Sen. Lauch Faircloth, R-NC.
It would be a “sentry on guard,” he argued, protecting the retirement and pension funds of middle- and working-class Americans.
Solomon and Faircloth are concerned because of recent precipitous downswings of Asian stocks, especially the “red chips” — Chinese government-owned companies listed on the Hong Kong stock exchange.
Because few individual investors dabble in Asian markets — let alone red chips — the fluctuations of Asian stock markets probably strike most Americans as pretty arcane. However, red chips are purchased by retirement funds and mutuals — the very entities in which many ordinary people have invested their life savings.
An investigative report aired recently by National Empowerment Television (NET), “Red Gold Rising,” goes far in explaining the potential for damage deliberate manipulation of the red-chip stock market has on our political processes, on investment markets — and on personal retirement plans. It also turns upside-down the notion that “privatization” in China means private investment and private ownership of property.
The NET report also focused on the role Chinese money and companies played in Bill Clinton’s election successes, not only his run for the presidency but earlier campaigns for governor of Arkansas. When Little Rock-based Worthen Bank nearly collapsed in 1985, it was secretly holding $52 million worth of pension fund money placed there under highly “questionable circumstances,” according to NET. Had the bank collapsed at that point, Clinton’s political career may have followed.
But Mochtar Riady and investment banker Jackson Stephens “bailed out the bank and the pension fund and managed to hush everything up,” recalled veteran financial reporter James Ring Adams, when interviewed by NET.
“They pulled Clinton’s chestnuts out of the fire and made his future career possible,” he said.
Adams suggests it was time for a quid pro quo. Clinton sponsored a law in the state legislature that allowed the state teachers’ retirement fund “extreme latitude” in investing. And how did the fund directors exercise their new discretionary powers? By investing in such China-owned firms as Norinco, which makes AK-47 automatic rifles for the Peoples’ Liberation Army, and COSCO — the gigantic shipping outfit currently under congressional and FBI investigation for smuggling 2,000 AK-47s into this country.
This means Arkansas teachers have been unwittingly subsidizing the very company that makes so-called assault rifles and one that attempted to smuggle them to L.A. street gangs.
By mid-1986, the Arkansas State Teachers’ Retirement Board, which has complete oversight over investments, was suddenly “beseiged by people who had political ties, who wanted to use some of our excess funding,” recalled Julia Hughes Jones, former Arkansas State Auditor and pension board member.
These included Chinese firms which were later happy to make contributions to the Democratic National Committee and assorted Democratic campaigns. Not surprisingly, pension fund dollars flowed to Chinese-government sponsored firms.
Bill Shirron, who was appointed retirement board director by then-Gov. Clinton in 1986, sees nothing objectionable in investing in a firm caught smuggling AK-47s.
“Our money managers have the discretion,” he explained. “If they feel that this is a good investment, they have the authority to do it.” He likened the investment in Norinco to investing in tobacco stocks.
Shirron admitted that teachers “probably wouldn’t like it” if they knew how their pension money was being used. However, he dismissed the suggestion that there was “any political steering on my part.” “I would not think there was influence in any way,” he said. Jones disagrees.
“When you see an Arkansas pension fund investing in a Chinese company that has given large campaign donations, I would guess that’s a repayment of a political debt,” she observed.
But the Arkansas teachers’ retirement fund isn’t the only place where China funds are being invested. And though millions of dollars are involved, Solomon and Faircloth realize the cash flow is small compared to what China’s really after — the Wall Street markets.
Business Week estimates there may be $25 billion in red-chips looking for investors. But the SEC regulations require disclosure: who are the owners, who is on the board of directors, and so on. The SEC also forbids foreign or offshore companies to sell on-shore without making disclosures. There is, however, an exception to the rule — Rule 144a — that allows a mutual or pension fund, or other “qualified institutional investor” to purchase foreign stocks.
“We’ve uncovered a kind of pyramid scheme,” said Ethan Gutmann, chief researcher for NET investigative programs. [It’s] “a scheme to artificially inflate the price of Chinese red chips — a scheme anchored by your retirement funds.”
Gutmann outlines the six-step program:
- The state owns everything.
- The state sets up a company and gives it assets.
- The state leaks information to the market that this company — a red chip — will get special treatment and monopoly concessions.
- The Hong Kong market goes crazy, but the government allows only 10 percent of the stock to be offered, so the supply is limited. The government owns the other 90 percent.
- The supply is tightened further, and the majority of available shares are sold at a discount to Hong Kong fellow travelers, plus favored Wall Street investment houses such as Morgan Stanley.
The small investor in Hong Kong scrambles to get remaining shares.
Now the final step: “The Hong Kong fatcats and Wall Street bankers unload their shares, not to the Hong Kong market, but here, into US pension funds through Rule 144a,” explains Gutmann.
“The U.S. pensioners hold the paper, the shares with inflated prices, totally out of proportion to the real value of the red chip,” says Gutmann. He asks rhetorically, “Are we looking at the ultimate China lobby?”
The complete transcript of “Red Gold Rising” can be found on NET’s web site. http://net.fcref.org/progmail/ai/trans.htm
Syria and America’s bloody diplomacy
Mike Pottage