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US security focus on Chinese state ownership is not productive, advisory panel is told

Jodi Xu Klein
·3 min read

Washington's national security strategy of forcing Chinese firms to disclose their relationship with Beijing is a dead end, US financial market experts told a congressional advisory panel on Friday.

Members of the US-China Economic and Security Review Commission (USCC), which studies the national security implications of trade and economic relationships, were advised that US interests would be better served by understanding the sector the Chinese companies are in, the kinds of technologies they produce and the services they provide.

"The upshot is that US efforts to regulate Chinese companies based on ownership are doomed to fail," said Anne Stevenson-Yang, co-founder of J Capital Research, which focuses on China's macro economy and Chinese companies.

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Meg Rithmire, a professor at the Harvard Business School, agreed that the US strategy should go beyond the Chinese Communist Party's ownership of private companies.

"I'm not sure that there's any kind of information that could be disclosed in terms of state influence, shareholding structure or ownership that would be useful in that national security sense," said Rithmire, referring to Chinese companies' lack of authority to provide disclosures since they are hemmed in by state secret laws.

The hearing comes as China lures an increasing amount of US investment into its capital markets, while the US has tightened its restrictions on China.

China's military-civil policy, an effort to leverage private sector strength to help modernise the military and develop cutting-edge technologies, has raised concerns about private companies' independence.

Since June, the US Defence Department has added 44 Chinese companies to a blacklist because of their suspected ties to the Chinese military, and Americans are barred from investing in them.

To be removed from the list, Chinese firms must provide evidence that they operate independently from the government. To date, no companies have succeeded in satisfying this requirement.

On Wednesday, the US Federal Communications Commission took another step toward revoking the licences of three Chinese telecoms carriers - China Unicom (Americas), Pacific Networks, and its subsidiary ComNet - saying evidence they provided to show independence was insufficient. China Unicom (Americas) and China Telecom, two of the three Chinese leading telecoms providers, are also on the Defence Department's military companies list.

On Friday, USCC co-commissioner Bob Borochoff said the hearing sought to help give American firms greater clarity as they navigate Chinese markets. But experts said such understanding is hard to come by if the hope is pinned on more disclosure about Communist Party ownership of private firms.

The data is scarce and difficult to obtain. China is opaque about the flow of state and private capital, they said. Without accurate data, it is impossible to gauge the state economic control in private companies, they told the commissioners.

"My reading is that if the CCP wants control, they will get it. Whether they get it through nationalising the firm or through informal means, there are potential pathways for that control," said Tamar Groswald Ozery, a fellow at the Harvard Law School Programme on Corporate Governance.

"The legal framework of the state-owned enterprises assets law gives the state, even as a minority shareholder, the option to propose candidates for the board of directors. This normally would not be something that is given to public shareholders," she added.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.