US Taxpayers Subsidize the Chinese Government

By Dr. Antonio Graceffo

Paying US Money to State-Owned Banks

The 50 developing countries which have joined China’s Belt and Road Initiative (BRI) now owe an average of 15% of their GDP to China. The money that is loaned to these countries comes largely from two sources, the China Development Bank and Export-Import Bank of China, both of which are state owned (Weizent, 2019). The basic model for BRI financing is that a Chinese state-owned bank loans money to a developing country, at interest, to finance infrastructure construction, such as building new highways or high-speed rails. Most of the construction is carried out by Chinese companies, with materials purchased from China. This means that China effectively gets all of the money back almost immediately, but then the debt payments begin. When countries find it difficult to make their loan payments they reach out to the US or EU, or international organizations such as the International Monetary Fund (IMF) or World Bank. If debt relief aid is given, these international organizations would effectively be putting money in the pockets of China’s Communist Party.

State-Owned Enterprises Invest in the US

State-owned enterprises still account for roughly 25% of China’s GDP (Zhang,(2018). This figure does not include companies, even publicly traded companies, where the state or a state agency or another state-owned enterprise is the majority shareholder. In 2019, of the 156 Chinese companies listed on the three major US exchanges, 11 were directly state-owned. How many of the others had state-controlled actors as majority shareholders was difficult to determine. Fifty of the firms were not included in the Public Company Accounting Oversight Board’s (PCAOB) 2018 review of non-US companies, because PCAOB were denied access. And these figures only accounts for companies based in Mainland China. They do not include Chinese companies, whether state or private, based out of Hong Kong or other offshore locations. Therefore, the number of Chinese companies listed on the three major US exchanges is actually even higher (U.S.-China Economic and Security Review Commission, n.d.). By allowing state-owned and state-controlled enterprises to list on the US exchanges, the US is allowing the Communist Party to take advantage of US capital markets.

But companies that are 100% private can be working for the Chinese government. All Chinese companies, state and private are bound Under the Chinese National Security Law of 2017 which says that Chinese companies are required to assist the government in intelligence gathering. This includes Huawei which is believed to be state owned.

China’s largest firms, both state and private, play a pivotal role in the country’s economic ambition and are often called upon to serve the state, in such endeavors as "advancing economic initiatives abroad such as ‘One Belt, One Road’" (Malkawi, 2019). In the current trade war, Xi Jinping has asked the countries 97 largest companies, the National Champions, under the State-owned Asset Supervision and Administration Commission, to stabilize the economy, by increasing their profits to 9% (Xin, 2019, June 17). Whether through direct ownership, indirect ownership, or by decree, Beijing controls China’s companies, and the companies serve the state’s ambitions.

Chinese state-owned enterprises have invested heavily in the US, buying everything from hotels to commercial real-estate. Chinese investors, both state and private, have also been gobbling up energy companies, such as The AES Corp., Chesapeake Energy, and Oil & Gas Assets. In 2010, China Communications Construction Co. bought 100% of Friede Goldman United. And in 2012, A-Tech Wind Power (Jiangxi) bought 100% of Cirrus Wind Energy. Starwood Hotels, New York’s Waldorf-Astoria was also purchased by a Chinese company. Other Chinese acquisitions include Ingram Micro, General Electric Appliance Business, Terex Corp, Legendary Entertainment Group, and AMC Entertainment Holdings (Nash-Hoff, 2018).

In 2016, the U.S.-China Economic and Security Review Commission, in its annual report to congress, explained that “the Chinese Communist Party has used state-backed enterprises as the primary economic tool to advance and achieve its national security objectives.” They further recommended that congress expand the powers and authority of the Committee on Foreign Investment in the United States (CFIUS) to block the acquisition of US companies by Chinese state-owned enterprises (Lawder, 2016).

Chinese SOEs are so heavily invested in the US that a number of US government and non-government entities are now financing Beijing’s interests including: the Export-Import Bank of the United States, as well as US pension funds, mutual funds, private investors, and even US government subsidies which are going to Chinese owned firms with close ties to the government.

During the Cold War, it would have been unthinkable for US sources to fund Soviet interests. Today, trade negotiations between the US and China are undermined by the fact that without yielding even an inch on trade, China can benefit from US capital markets and investment.

Export-Import Bank of the United States

The Export-Import Bank of the United States supports US exports by providing loans and guarantees to foreign purchasers. The primary beneficiary of these services is China, to the tune of $2 billion dollars, last year, three quarters of which went to Chinese state-owned enterprises. Three of the companies which receive the most funding from the Export-Import Bank of the Unites States are China Southern Airlines, the Industrial and Commercial Bank of China (ICBC), and Air China, all of which are state-owned. In 2014, US Ex-Im extended a $300 million loan guarantee to ICBC for the purchase of US made Boeing jets (Carney, 2019). They have even extended financing to China National Nuclear Corporation which engages in both civilian and military nuclear activities including power generation and weapons production (Global Security, n.d.). In one bizarre case in 2002, the US arm of China’s state-owned oil company Sinopec was exporting services to the state-owned China National Offshore Oil Corporation, financed through a Chinese bank. Because the exporter was technically a US firm. Ex-Im guaranteed $200 million of the financing. (Carney, 2019).

China Benefits from US Pork Subsidies

The 2013 acquisition of Smithfield Foods for $7.1 billion by China’s Shuanghui Group, represents the largest Chinese takeover of an American firm in history. The move came at the behest of the Chinese government whose 2011 Five-Year-Plan called for China to increase its food security by having both private and state-owned firms acquire foreign food companies. Smithfield, now a Chinese company, owns roughly 25% of all pork production in the US.

Before the announcement of the Five-Year plan, China owned just $81 million of US farmland. By 2012, that number had jumped to $900 million, and currently stands at $1.4 billion. With the Smithfield acquisition, Shuanghui has now become the world’s largest producer of packaged meats, fulfilling another of Xi Jinping’s edicts to create global champions (Halverson, 2018).

Although Shuanghui is not state-owned, in its company brochure it recognizes its duty to adhere to Beijing’s five-year plans, “And the document was clear. Shuanghui meets its obligations and follows the path laid out by the Communist Party. Despite its public listing in Hong Kong, Shuanghui answers to the Chinese government – going beyond regulatory compliance. It receives directives from Beijing, and it follows them.” (Halverson, 2018).

In exchange for helping to further the economic plans of the communist party, companies can benefit from soft loans, granted by state-owned banks. For example, Shuanghui received a $4 billion loan for the Smithfield takeover, a loan which was approved in a single day. According to The Bank of China’s 2013 annual report, granting the loan was part of the bank’s social responsibility in carrying out the government’s plan to have Chinese companies expand, by buying up their overseas competition. In addition to loans, the Chinese government has granted Shuanghui $2 billion in subsidies (Halverson, 2018).

The US does much less to restrict market access for Chinese firms than vice versa. Semi-conductors, energy, nuclear, military hardware and food would all be off limits for US investment in China. At present, the Treasury Department, which reviews foreign acquisitions of major U.S. businesses, does not include food as part of national security. Voices in congress are asking to have the definition expanded, to protect US food and farms (Halverson, 2018).

On top of all of the soft loans and unfair subsidies Shuanghui was able to obtain at home, Smithfield Foods qualified for part of the $1.2 billion in US farm subsidies, created in 2018 (Stein, 2018).

China Needs US Money

In the 15th Five Year Plan, Xi Jinping called for innovation and development in technology. Technology is a type of business which requires a lot of cash and which may or may not turn a profit. And the best place to find cash investment for Chinese technology is in the US.

Since 2013, 101 new Chinese companies have listed on US exchanges, raising a total of $46.1 billion, which makes China number 2, behind US companies, at raising money from US listings. This year, Chinese companies have accounted for 55% of all foreign listings, raising more than $1.18 billion. In the past five years, the largest of Chinese IPO was Alibaba Group Holding's  which raised $25 billion (Bray, 2019)

If President Trump moved to delist Chinese firms from US exchanges, on the one hand, this would be somewhat damaging for the US economy, as these IPOs would move to Shanghai or Hong Kong. On the other hand, as the US has the deepest capital markets, this would most likely hamstring China’s ability to bring new technology firms to market and, ultimately, to raise money for research and development (Bray, 2019).

Much of the money which funds China’s technology startups comes from venture capital firms who manage money for public retirements, be they teachers, firefighters or police, from Connecticut to Oregon. The venture capital firms seek out likely companies to invest in, creating a portfolio of various stakes in multiple companies. As technology is an area of fast growth and high upside potential, they wind up investing in such companies as Chinese drone maker, DJI and artificial-intelligence pioneer SenseTime Group Ltd. Delaware Public Employees Retirement System and the State of Michigan Retirement System were both significant investors responsible for DJI’s growth into the world’s leading drone maker. This year, the U.S. Department of Homeland Security has warned about investing in Chinese drones, for national security reasons, but it is unclear if any bans have been put in place. A Chinese artificial intelligence firm, SenseTime, received funding from the California Public Employees’ Retirement System, Washington State Investment Board, and the Teacher Retirement System of Texas (Banjo et al, 2019).

SenseTime, along with Megvii, and Yitu have all been black listed by the Trump administration due to implications of human rights violations and their use in repressing the Uyghur in Xinjiang. This means the three firms are banned “from doing business in the United States, prohibiting them from purchasing US products or maintaining relationships with American entities” (Mac, 2019).

ByteDance Ltd., a leading developer of AI apps, has benefited from funds raised through the New York State Teachers’ Retirement System, Oregon Public Employees Retirement System and the Minnesota State Board of Investment. Recently, Sugon was named as one of five additions to the US black list, along with Hygon, HMC, Haiguang Advanced Technology Investment, and Wuxi Jiangnan Institute of Computing Technology. Sugon makes data centers for Bytedance (Moss, 2019). This does not suggest that Bytedance is doing anything wrong, but it shows how, when dealing with Chinese companies, one is never too far away from the Chinese government or companies which have been black listed.

Possible Restrictions on Chinese Investment

The White House is considering restricting US investment in Chinese companies and even delisting Chinese companies from US exchanges, as well as preventing US government pension funds from investing in Chinese companies (Lavers & Li, 2019).

The Federal Retirement Thrift Investment Board, which manages Thrift Savings Plan (TSP), the 401(k) for federal employees, wanted to invest in the Morgan Stanley Capital International (MSCI) Emerging Markets Index, although many of the Chinese firms in the index are state-owned or state-directed (Rubio & Shaheen, 2019). Hikvision is a company which was featured in some of these indices. The company makes surveillance equipment which is currently used as a tool of repression against China’s Uyghur, Muslim minority in Xinjiang Uighur Autonomous Region. Both the New York State Teachers' Retirement System and the California State Teachers' Retirement System had invested in the company (BBC, 2019).

“Hikvision’s controlling shareholder, the China Electronics Technology Group Corporation, were added to the U.S. Commerce Department’s Entity List last year for ‘acting contrary to the national security or foreign policy interests of the United States.’” A federal ban has since been instituted, preventing US federal contractors from doing business with the company (Rubio & Shaheen, 2019). It is unclear if there has been a ban on US investment in the company. Major US investment companies such as Fidelity and Goldman Sachs have sold off their positions in Hikvision and Dahua, another surveillance firm which is a subsidiary of a Chinese company, owned by the China Investment Company, the government’s sovereign Wealth Fund (Ipvideomarket, 2019).

Other Chinese companies which manufacture Chinese weapons are still open to US investment. One such company is Aviation Industry Corporation of China (AVIC), “which U.S. Trade Representative Robert Lighthizer has described as ‘the sole domestic supplier’ of bombers, fighter jets, and other aircraft for the People’s Liberation Army’” (Rubio & Shaheen, 2019).

CFIUS (Committee on Foreign investment in the US) is an umbrella agency composed of 32 different federal agencies which review foreign investment which could threaten national security. CFIUS usually investigates investments in technology or military contracts, military installations or other sensitive information, but currently has no responsibility for food or drug, USDA or FDA investments (Townsend, 2019). In the previous administration, President Obama, acting on national security concerns, blocked a Chinese takeover of a semi-conductor manufacturer. In September of 2017, President Trump also halted the Chinese acquisition of Lattice, an American semi-conductor manufacturer. CFIUS prevented the Chinese from purchasing the money transfer company, Money Gram, on concerns that data on millions of Americans could be compromised. They also blocked the takeover of a Massachusetts tech company. And the state of Iowa has outlawed selling farmland to foreign buyers (Townsend, 2019).

Conclusion

It can be seen that steps are being taken to protect American interests, but many feel these steps need to be intensified, and that, following Iowa’s example, the federal government should take steps to protect food and farmland. Many also feel that there should be a blanket ban against US investment in or investment by Chinese state-owned companies, companies controlled by the state, or companies developing weapons and hardware or software with military applications. If the ban were extended to Chinese companies fulfilling government plans and edicts, this would effectively block all Chinese firms from receiving money from or investing in the US.

About the Author

Antonio Graceffo PhD China-MBA, worked as an economics researcher and university professor in China for seven years. Currently, he is serving as a senior program manager in Mongolia. He holds a PhD from Shanghai University of Sport Wushu Department where he wrote his dissertation “A Cross Cultural Comparison of Chinese and Western Wrestling” in Chinese. He is the author of 11 books, including Beyond the Belt and Road: China’s Global Economic Expansion, A Deeper Look at the Chinese Economy, The Wrestler’s Dissertation, and Warrior Odyssey. Antonio completed post-doctoral coursework in economics at Shanghai University, specializing in US-China Trade, China’s Belt and Road Initiative, and Trump-China economics. His China economic reports are featured regularly in The Foreign Policy Journal and published in Chinese at The Shanghai Institute of American Studies, a Chinese government think tank. 

About the Author

Antonio Graceffo PhD China-MBA, worked as an economics researcher and university professor in China for seven years. Currently, he is serving as a senior program manager in Mongolia. He holds a PhD from Shanghai University of Sport Wushu Department where he wrote his dissertation “A Cross Cultural Comparison of Chinese and Western Wrestling” in Chinese. He is the author of 11 books, including Beyond the Belt and Road: China’s Global Economic Expansion, A Deeper Look at the Chinese Economy, The Wrestler’s Dissertation, and Warrior Odyssey. Antonio completed post-doctoral coursework in economics at Shanghai University, specializing in US-China Trade, China’s Belt and Road Initiative, and Trump-China economics. His China economic reports are featured regularly in The Foreign Policy Journal and published in Chinese at The Shanghai Institute of American Studies, a Chinese government think tank. 

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