[Congressional Record Volume 143, Number 149 (Thursday, October 30, 1997)]
[Extensions of Remarks]
[Pages E2130-E2131]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                                 CHINA

                                 ______
                                 

                        HON. GERALD B.H. SOLOMON

                              of new york

                    in the house of representatives

                      Wednesday, October 29, 1997

  Mr. SOLOMON. Mr. Speaker, for my entire career as a Congressman, I 
have been extremely concerned about the capabilities and intentions of 
the People's Republic of China. I see a totalitarian dictatorship with 
nuclear weapons and the intent to provide weapons of mass destruction 
to terrorist nations. Of equal concern is the People's Republic of 
China's actions and desire to wage economic warfare against America by 
engaging in economic espionage. But even worse is their potential to 
improperly infiltrate and illegally manipulate capital markets through 
fraudulent market offerings. We cannot afford to let our guard down and 
allow them to hold hostage America's future growth and security by 
jeopardizing American retirement and pension funds.
  For that reason, I commend to you the attached article from the Wall 
Street Journal and announce my intent to introduce legislation that 
will protect us from this latest form of assault on our national 
security.

             [From the Wall Street Journal, Oct. 29, 1997]

            Hong Kong's Market Stops Believing in `Miracles'

                       (By Holman W. Jenkins Jr.)

       Apropos of the turmoil that began in Hong Kong last week 
     and spread through the world's stock markets, we have to 
     admit to missing Zhou Beifang just a little.
       Though he happens to be serving a life sentence in a 
     Chinese prison these days, back in the early 1990s he was 
     feted by Hong Kong's business elite as the ``king of backdoor 
     listings.''
       His story had an improbably epic quality: Growing up wild 
     on the streets of Beijing during the Cultural Revolution, 
     when his father, an old military comrade of Deng Ziaoping, 
     was in disgrace; landing with a splash in Hong Kong in his 
     early 40s, as head of the offshore arm of China's giant 
     Shougang steel works, now led by his rehabilitated father.
       The younger Zhou embodied all the yuppie striving of a 
     generation robbed of education and privilege by Mao's class 
     war. Soon everything he touched turned to gold for the Hong 
     Kong investors who followed him. His trick was to take over 
     moribund companies on the local stock exchange, and make 
     their shares jump as he loaded them with mainland assets on 
     preferential terms. In a very short time his empire was worth 
     $1.4 billion.
       ``We don't know whether these transactions were approved by 
     some authority in Beijing, or what it would mean if they 
     were,'' an editorial in The Asian Wall Street Journal 
     ruefully wondered at the time. Six months later Mr. Zhou had 
     been recalled to Beijing and arrested.
       It shouldn't be surprising that Asia turned out to be the 
     knock that finally set the global bull market on its ear. 
     Those who mistake chronology for explanation have tried to 
     trace the dominoes back to the Thai baht. But the problem 
     goes deeper.
       For the Asian ``miracle'' had two solid pillars--the high 
     savings and low wages of its workers--and a third illusory 
     one: the supposed omni-competence of its elites.
       Let us further note that much of the optimism embedded in 
     the global share prices was, on some level, specifically 
     China optimism. It was always obvious that bringing China 
     aboard the global economy was the game at hand. To hear 
     Boeing, Coca-Cola and Procter & Gamble tell it, China 
     underlay their every hope of earnings as far as the eye can 
     see.
       In Hong Kong, where Western finance meets Chinese reality, 
     the experts are belatedly now trying to sort out the 
     fundamentals from the Zhou Beifangism in the China story.
       Consider the deal Goldman Sachs and a bevy of lesser banks 
     brought to market into the teeth of last week's mayhem. The 
     offering consisted of government-owned cellular operators in 
     two provinces cobbled into a package that gave a mere 
     minority stake to private investors for $3 billion.
       Amid much bickering between the Chinese and their bankers, 
     the price was actually raised half-way through the offering, 
     to a multiple far richer than what other Asian telecom giants 
     are selling for. And then to stir up sagging demand the head 
     of the Chinese telecom ministry hinted at juicy asset 
     injections while talking to the press in Shenzhen. ``The 
     listing of China Telecom will be the first course of a big 
     banquet and bigger courses will be served later,'' he 
     promised.
       Those are the kind of Zhouesque expectations that had small 
     investors in Hong Kong lining up around the block this past 
     summer for new offerings by mainland companies with no track 
     record, little disclosure and managements that operate under 
     an uncertain set of incentives.
       That's a strange way to sell stock, because underlying it 
     is an invitation to believe that you're in bed with some 
     Chinese muckety-muck, who's going to use his connections 
     for his own quick enrichment, and therefore yours. Yet 
     small investors aren't the only ones who've fallen for 
     this. Britain's Cable & Wireless earlier in the year sold 
     the Chinese ministry a chunk of Hongkong Telecom at a 
     substantial discount, in return for the promise of special 
     access to the mainland phone market, in the form of C&W 
     getting a piece of the China Telecom flotation.
       C&W last week didn't get any of China Telecom. Instead, it 
     was the usual suspects among China's cronies in the Hong Kong 
     tycoon class who got discounted allocations of the new issue.
       So many dreams end this way. Morgan Stanley, the most 
     China-exuberant of U.S. banks, put up $35 million to 
     capitalize Beijing's first joint-venture investment bank. In 
     due course, it found itself squeezed out of a lead role in 
     the China Telecom flotation by its inexperienced creation, 
     and then last month learned that its offspring was coming to 
     Hong Kong to compete with Morgan Stanley there, rather than 
     opening the door so Morgan Stanley could become a player on 
     the mainland, as it had feverently hoped.
       Over lunch a few years ago, the local Chinese head of a 
     Western investment firm explained that the mainland deals he 
     was then busily underwriting were destined for fund managers 
     in the U.S. who felt a indiscriminate need for ``China 
     exposure.''
       Asked if he owned any himself, he made a face that said: 
     ``Are you on drugs?''
       Yet he quickly warmed to a favorite topic, how to make all 
     this actually work for China. His idea: Give Chinese managers 
     stock options that vest only after a time, so they might at 
     least be tempted to use their positions to grow real earnings 
     rather than to launder assets offshore.
       In the wake of crashing markets all around the globe, the 
     words ``accountability'' and ``transparency'' are suddenly 
     getting a workout by Western analysts in Hong Kong--although 
     earlier in the year several had quietly been dismissed for 
     voicing skepticism about Chinese offerings.
       As it happened, the Red Chip bonfire of last summer was 
     accompanied by insider wheeling and dealing and ramping of a 
     type not seen since the Hong Kong market cleaned up its act 
     in the late 1980s, with the formation of an anti-corruption 
     task force. Western bankers, letting their standards drop in 
     their eagerness to cultivate a big new client, have been the 
     quiescent instruments of these shenanigans.
       Well, ``when in Rome'' and all that. But still, these 
     institutions are global brand-names now, with retail 
     investors at home looking to them as guarantors of their 
     retirement security. That ought to be reason enough for 
     bankers to begin drawing more sharply the question of whether 
     these deals are really financing China's development or 
     merely financing capital flight.
       Anyhow, now comes the moment when we find out whether all 
     the billions China has been absorbing went to build 
     skyscrapers without tenants and factories without customers.
       Hong Kong remains Asia's best-disciplined economy, with its 
     most professional class of managers outside of Tokyo. The 
     current mess will work out for the best only if it leaves 
     everyone in the region with a stronger taste for these 
     qualities.


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