The National Security and Human Rights Dimensions of China’s Presence in the U.S. Capital Markets

The National Security and Human Rights Dimensions of China’s Presence in the U.S. Capital Markets
(Roger W. Robinson, Jr., May 12, 2021)

Transcript available below

About the speaker

For over 40 years, Mr. Robinson has been evaluating the intersection of global economics and finance and national security concerns. He was formerly Senior Director of International Economic Affairs at the National Security Council and Executive Secretary of the Cabinet-level Senior Inter-Governmental Group for International Economic Policy (SIG-IEP) under President Reagan.

Prior to his government service, Mr. Robinson was a Vice President in the International Department of the Chase Manhattan Bank with responsibilities for the bank’s loan portfolios in the former Soviet Union, Eastern and Central Europe and Yugoslavia. He also served as a personal assistant to former Chase Chairman David Rockefeller for two and a half years.

From 2001 to 2005, Mr. Robinson served as Chairman and Vice Chairman of the Congressionally U.S.-China Economic and Security Review Commission. He co-founded the Prague Security Studies Institute in early 2002 and incorporated PSSI Washington Inc. in October 2006.

He has published regularly on security topics in his field and had an extensive footprint in the media and on Capitol Hill. Mr. Robinson earned his MA in International Affairs at the Elliott School of George Washington University and a BA from Duke University.


Bob Reilly:

Hello and welcome to the Westminster Institute. I am Bob Reilly, its director. Our speaker today is Roger Robinson, who is the Co-founder and Chairman of the Prague Securities Studies Institute whose purpose is to help safeguard and strengthen the individual freedoms and democratic institutions of the countries in Central and Eastern Europe and beyond. He served as Senior Director of International Economic Affairs on President Reagan’s National Security Council, where he was the principal architect of the secret economic and financial strategy that proved decisive in the defeat of the Soviet Union.

He later served as Chairman of the Congressional U.S-China Economic and Security Review Commission. Prior to his government service, Roger was a Vice President in the International Department of the Chase Manhattan Bank. He earned his B.A. from Duke University and an M.A from George Washington University. Roger’s topic today is, “The National Security and Human Rights Dimensions of China’s Presence in the U.S. Capital Markets.” Roger, welcome.

Roger Robinson:

Well, thank you very much, Bob. We go back a long way — and my thanks to the Westminster Institute for providing this opportunity to share some thoughts with you on what is a very underreported new front in the U.S.-China rivalry that can be summed up in two simple words: the money. We’ve all heard a lot about trade and tariffs — appropriately. We’ve also heard a good deal about technology theft and, albeit belatedly, we’re doing much more about it — all to the good.

But the most glaring deficit or blind spot for the U.S. in the bilateral relationship has been the massive annual dollar financing requirements of the Chinese Communist Party (CCP), and the fact that their companies and government are looking to us, namely, the U.S. capital markets — and the use of the dollar — to provide the bulk of those large annual infusions of hard currency cash.

The truth of the matter is that for some twenty years now China has been able to tap into our capital markets, our stock and bond markets, through equity and bond offerings as well as a thousand or more of their companies being part of what you might term passive investment vehicles. These are index funds or mutual funds. Passive investing is essentially where an investor leaves it up to their fund managers to decide where their money’s going and how it’s going to be used. Such Wall Street funds have loaded up on hundreds of Chinese companies to most Americans’ surprise. This means that as many as 150 million of us, retail investors, in our stock and bond markets — through our pension funds, IRAs, and a whole range of other investment portfolios — are, in fact, holding not only these Chinese companies in portfolio, but are funding Chinese corporate bad actors as well.

Now, what do I mean by a corporate bad actors? Well, there are a number of examples and I will try to provide a few. Some of these companies are enabling, and indeed aiding and abetting, genocide against the Uyghurs and other religious minorities in Xinjiang. Also, on the human rights front, other Chinese enterprises are helping construct the country’s massive, repressive “surveillance state” and credit scoring system, all ways in which the Communist Party maintains a tight lid on the Chinese people, denying them virtually all individual freedoms.

On the national security side, scores of millions of us are funding, unwittingly, advanced weapon systems for use by the People’s Liberation Army and other Chinese military and espionage-related services. Others of these Chinese companies are building and helping militarize the illegal islands that China has constructed in the South China Sea. We’re likewise funding weapons proliferation to such countries as North Korea, Iran, and other adversaries of the United States. So we’re helping fund Chinese corporate hackers that are trying to steal our personal data and our government and military secrets — and the list goes on.

The U.S. government has recognized that many of these Chinese companies are bad actors by virtue of the fact that they’re already sanctioned by the United States. Some 300 such Chinese enterprises, for example, appear on the Commerce Department’s Entity List, which prohibits the supply of American component parts, technology, equipment, and services to Chinese companies that are on that list because of acute national security and human rights concerns.

There also exists a new Pentagon PLA list, as I affectionately call it, a list of some 44 “Communist Chinese Military Companies,” those are the words of the Pentagon, that have been added to date at the demand of the Congress and embodied in law under the National Defense Authorization Act of 2021 — that was originally passed in 1999, but ignored for some 20 years.

Fortunately, the previous administration contributed Executive Order 13959 in November of 2020 that has the effect of barring any U.S. persons worldwide from holding the stocks and bonds of the companies that appear on this Pentagon PLA list effective November 11 of this year. This Executive Order represents the first capital market sanctions, that I know of, in the history of the United States. While it is true that some sanctions have affected our financial markets to be sure, like Iran and so forth, I have never seen anything directed toward a major adversary like a China and Russia that were explicitly capital market sanctions and using this immense source of leverage, which I will be describing to you.

So there are some corporate human rights abusers even on the Pentagon list, like the company Hikvision, that provide the surveillance cameras that are placed every few meters atop the walls of concentration camps holding well over a million Uyghurs and other religious minorities in Xinjiang.

The Commerce Department’s Entity List also includes dozens of corporate human rights violators like Megvii and iFlytek, that are favorites of Wall Street fund managers and present in the MSCI indices, the FTSE Russell indices, Bloomberg Barclays, Dow S&P and others. Accordingly, index funds that are benchmarked against these indices — like those of BlackRock and Vanguard — and in the portfolios of most Americans in the markets, include a number of Chinese corporate bad actors, including companies already sanctioned by the United States.

Now, let that sink in for just a moment. One knows that, for example, if a Chinese company is placed on the Entity List, Americans are not allowed to supply that company with technology or equipment, but apparently it’s okay to fund them and help finance their nefarious activities around the world — with your money, mind you. So this issue is not an abstraction. This is not some far away problem for you to consider. No, this involves your hard-earned investment dollars, including your retirement funds.

Now, these bad actor Chinese enterprises are also in college and university endowments throughout the country, and I am talking about Harvard, Yale, the whole lot of them, including state schools. And lots of universities pride themselves in their social consciousness, their sensitivity, for example, to human rights concerns or at least this is what is advertised— — so why are they holding Chinese companies in portfolio that are aiding and abetting genocide? I am pausing deliberately. These are fair questions that need to be asked throughout our country.

As I said, we’re not talking about a few billion or tens of billions or even hundreds of billions of dollars here. We’re well beyond that. We’re in the trillions of dollars with a t and the estimate now is that American investors are holding as much as 1.9 trillion dollars of Chinese stocks, meaning our money transferred to them. Hundreds of billions more are invested in dollar-denominated Chinese corporate bonds.

We even have U.S. investors holding Chinese sovereign bonds. Now what do I mean by that? Well, the Chinese Communist Party issues bonds in dollars and we buy them — I am sure unwittingly — through our Wall Street fund managers, brokers and financial advisers because they’re perceived to have a good return on investment. They might be paying three or four percent for a ten-year bond offering, which is half a point somewhere else. So these are the kinds of considerations, that are very narrow, that are on the minds of the Wall Street folks who are managing our money.

But what it really means is that, again, our hard-earned dollars are going directly into the coffers of the Chinese Communist Party for their discretionary use as they alone judge necessary, so there is no purpose to these loans, to this money. They can do with it as they wish and that includes their security services, espionage activities in the United States, etc.

So providing cash, which this is, to the Chinese Communist Party is strangely and unhappily reminiscent of the United States during World War I and World War II when Americans bought liberty bonds in order to fund our war efforts and secure the world for peace against malevolent, totalitarian regimes at that time in history. Well, welcome to what I call “anti-liberty bonds”, because that is what we’re, in effect, funding now.

And the same is true, by the way, with Russian sovereign bonds. State public pension systems are holding hundreds of millions of dollars, probably in the billions of Russian sovereign bonds as well. So tell me how it is the American government never let the American people fully understand this and where is the due diligence? Where was the screening of all of this? I mean we have CFIUS, our Committee on Foreign Investment in the United States, which helps defend American assets by monitoring what China is trying to buy in our country to make sure that it is not security-relevant. Where is the similar safeguard or screening vis-à-vis the capital markets? I will tell you, it never happened, and I am talking two decades now. So just imagine the influx of the kind of companies from China that we are talking about today.

Has there been a clear signal from the Treasury Department, that these are pressing national security, human rights and investment protection issues are being given priority attention there? Not yet. Is the SEC alert to the need for sensible remedies, disclosure requirements, possibly halting sanctioned companies from entering our capital markets? Sadly, no. In fact, in May of 2013, a part of the SEC called the Public Company Accounting Oversight Board, in effect, reached an agreement with the Chinese in the form of an MoU that waived the requirement for Chinese enterprises to comply with the same U.S. securities laws that apply to every American company.

Now, this business about a government oversight board or auditing function stemmed from the Enron and WorldCom disasters of the early 2000s’ large-scale fraud. And we found out that private sector auditing companies were part and parcel of the problem, and hence, why Sarbanes-Oxley and other legislation came along, later to become law, that said no, we want an independent audit by the U.S. government of the private sector auditors. You can debate that, but it is the law of the land.

American companies have to comply, the Chinese don’t, and as a result they are actually receiving preferential treatment to our own firms in our own markets. They don’t have a compliance burden that costs American companies sometimes millions a year in terms of paperwork and fulfilling these compliance requirements.

They have basically told us, “we’ll get around to disclosure some time in the future.’’ Well, it is not playing by the rules. We have let it go to date, but we are in this very bizarre circumstance where this multi-trillion dollar free lunch program for Beijing goes on unabated.

So when we look at where we are now, this capital markets issue area, fortunately, is gaining significant traction since we went public with a portion of our extensive research at RWR Advisory Group, which we had worked on on the cap markets for a solid two or three years to prepare a lengthy report for the government on China’s presence in our cap markets, which we submitted in July of 2018. It’s just a question mark as to was that study looked at carefully? I mean was it discussed on an inter-agency basis? I can’t really tell you what its fate was, but the point is in March of 2019 we started to release that research.

Up until that time, I would challenge you to find one article, one agenda item of a NGO, one congressional letter — forget legislation, one interagency meeting of government on the subject of the national security and human rights dimensions of China’s corporate presence in the U.S. capital markets, basically the title of today’s talk. And if you can find such articles, you are doing better than myself. Now, just imagine this never really seeing the light of day.

So it is worth taking just a moment at this juncture to say that when we talk about the malevolent behavior of the Chinese Communist Party and its state-controlled enterprises — which are often employed as power projection vehicles and are often weaponized against us — we’re not talking about the Chinese people. I mean there is no connective tissue there in the sense that I and a lot of us are hopeful of one day enjoying good relations with the Chinese people.

We’re sympathetic and feel sadness about the fact that they remain under the yoke of communist oppression. Moreover, in no form or fashion should these kind of disparaging remarks and cautionary remarks about the malevolent behavior of the Chinese Communist Party be in any way connected to our Asian-American community, and especially the fueling of mistrust and even violence of the type that we have seen, unfortunately, occur in our country.

Now, that said, I’d like to discuss briefly what we’ve gotten done so far and what remains to be done. On the first point, I’m pleased to say that the previous administration did step in and stop the Thrift Savings Plan — which is the retirement system for some six million federal employees, including our men and women in uniform — from switching out its International Fund, the international part of its investment portfolio, to a new index, namely the MSCI All-Country World ex US index.

Kind of a complicated name, but the TSP Board, the Thrift Savings Plan Board, was going to snap into place an index that was rife with U.S.-sanctioned and other Chinese corporate bad actors of the type that I have just described. And if let stand, Chinese corporate human rights and national security abusers would be in the retirement system of federal employees, including our military, who would be funding the very weapons systems designed to be used against them in the event of conflict. Now how ironic — and tragic — would that have been? And the president stepped in only two weeks before what was to be the implementation period of this development, so it was a close call but we narrowly averted that tragedy.

The Railroad Retirement Board, which is federally administered pension fund, was compelled by the White House to divest from all Chinese companies. Again, a number of egregious human rights and other corporate abusers were held in its investment portfolio. A Presidential Working Group was also convened by President Trump on the federal auditing requirement referenced earlier and some related issues.

Again, Chinese companies are not sharing their financials, declaring them — get this — “state secrets”. You can’t see their balance sheets and profit and loss statements. How can one conduct a proper risk assessment without such financials and without the confidence of a US government audit, especially as most of these companies are Chinese Communist Party-controlled?

Moreover, all Chinese companies must be compliant with Article 7 of the National Intelligence Law of China, which requires them to be compliant with the intelligence-gathering and other strategic purposes of the CCP. They’re all subject to having Communist Party cells embedded in their senior management structures, including the quasi private sector enterprises. They call them private sector, I don’t buy it. Let’s just call it quasi private sector for the purposes here. But the point is there is no Chinese company that is escaping the oversight of the Chinese Communist Party. I think that anybody by now should recognize that after the comeuppance for Jack Ma and Ali Baba and the experience of the Ant Group and its IPO, this might be for aficionados, but believe me, the word is out that you don’t cross the Communist Party and just think that you are going to go merrily on your way in global capital markets if you are a Chinese company because you most assuredly are not.

Now, the Congress has usefully gotten into the act and unanimously passed, in both the Senate and the House, what is called the “Holding Foreign Companies Accountable Act”, which basically says that if a Chinese company fails to have a PCAOB audit, a Public Company Accounting Oversight Board audit required by law, for three consecutive years, it will be delisted from U.S. exchanges and be, in effect, kicked out of U.S. cap markets. Now although this effort is to be applauded, they gave them three years. China has not been compliant for the seventeen years before that, and so the notion that they are going to step up now is pretty fanciful.

But it could mean that unfortunately while we are waiting to find out that China is not going to comply hundreds of billions of dollars more of American investor funds will move likely to the coffers of Beijing and fund the Chinese military and police-state tactics, like the concentration camps. Three years is just too long a runway, but at least the sentiment was right. Namely, this preferential treatment accorded Chinese companies, this multi-trillion-dollar unregulated free lunch program, should be brought to a swift close.

Now questions are moving around, how will the new administration react to these earlier legislative and Executive Branch actions, including Executive Order 13959? Will they support them? Although it remains to be seen, E.O. 13959 has not been rescinded as yet and remains in force. I was likewise encouraged that Secretary of State Blinken and others of the Biden Administration, for example, have maintained the genocide designation of Secretary of State Pompeo and other allies, despite some initial confusion. A bipartisan resolution by Senators Rubio and Coons, has institutionalized this important genocide designation with respect to the brutal treatment of the Uyghurs and other religious minorities.

Put simply, I’d argue, that dollar financing is arguably China’s single greatest vulnerability, and certainly one of our America’s greatest strengths. Our capital markets are roughly the size of the rest of the world’s combined. We also possess as much as two-thirds of the world’s liquidity, the world’s investable capital, and we also possess the world’s reserve currency. In short, China can’t replace elsewhere the depth, volume, the expertise or the prestige of the U.S. capital markets and they are stuck at the same time with a non-convertible currency.

Now, the CCP is said now to favor Hong Kong as the place to list its companies, and it is doing so at flying speed and at the minimum it is dual listing, that is they will list in New York and they will list in Hong Kong because they are trying to hedge their bets about this business of possibly being kicked off of U.S. exchanges if they don’t engage in proper disclosure, something that is repugnant to them.

But then look at the assault on Hong Kong’s legal system and even the rule of law itself. Look at the arrests of the leadership of Hong Kong’s democratic movement, like Martin Lee and Jimmy Lai. Look at the near daily evisceration of Hong Kong’s freedoms. Then tell me that Hong Kong can be sustained as the global financial hub that it is today, capable of meeting the dollar liquidity requirements of the mainland. I don’t think so — and hence the enormity of potential U.S. leverage over the CCP and the multiplicity of capital markets policy options that have opened up for the Executive Branch and the Congress of our country.

Now, I’m not suggesting that all Chinese companies be excised from our markets. And this is also not a clarion call for the world’s second largest economy to be expunged from any form of American investment. But one thing is critical — we can’t be in the business of funding national security threats to this country or human rights abuses. We can’t be funding enterprises enabling genocide, and the list goes on. We’re Americans. We can’t be protecting Wall Street fees and bilateral ties with Beijing while giving short shrift to our national security, our fundamental values and the protection of retail investors. So I’d like to stop here Bob and take your questions and comments, but thanks so much again for this opportunity.


Bob Reilly:

Roger, thank you very much. Let me begin with this question. I just saw a report that indicated that the issuance of Chinese equities on U.S. exchanges in 2020 was the largest since 2014, so they are — despite whatever strictures are in place that you mentioned, they seem to be even more active in our equity markets. Is that a cause of greater concern to you or do you think- in other words it does not seem to be inhibiting them. Maybe it is in terms of the companies that are on the Defense Department list.

Roger Robinson:

I think that’s a very good point, Bob. And the answer is that Wall Street really hasn’t gotten the memo yet. In most cases, financial firms and fund managers have done the absolute minimum required in terms of divesting Chinese corporate bad actors, the stocks and bonds of those companies. They see greater returns from China than in most other investment opportunities around the world in this period of very thin margins. They’re racing to get as many Chinese equities and debt offerings into the investment portfolios of the American people as possible while the going’s good.

After all, Wall Street isn’t entirely wrong about questioning Washington’s resolve in this new issue area when, for example, observers witnessed the previous Treasury Department, run by Steven Mnuchin, strongly resist the placing of Alibaba, Tencent, and Baidu on the Pentagon PLA list. Obviously, the Pentagon supported it, as did the Department of State. The intelligence was apparently there to justify such a step. And even in the open source it is clear that there was a problem.

So why didn’t it happen? Well, because it was argued by Treasury that some $200 billion in American investor funds were in Alibaba alone, $95 billion in Tencent, and $28 billion was in Baidu at the time. The feeling was that their existed too much investment exposure to sanction them with a prohibition on holding their securities. Now, to me, this sounds troublingly like “too big to sanction.” You have heard of too big to fail. Welcome to too big to sanction.

Now, when you think about it, that is very bad news. What will that investor exposure in those companies alone look like a year or two from now? I mean if they are worried about $320 billion, how are they going to feel when it is $500 or $600 billion. Do we really think that kicking the can down the road will have any positive effect in a circumstance like this? What about three years from now when those 150 or so million Americans, including most of the folks that are watching this video, wake up one morning and realize that 9%, 12%, 15%, or even nearing 20% of their entire investment portfolios are comprised of Chinese securities, Chinese stocks and bonds?

Those folks would then have a vested financial interest in ensuring that we aren’t going to be imposing U.S. sanctions on China or the CCP almost irrespective of the severity of the offenses committed against us for fear that it would damage the value of our IRAs and other investment portfolios.

Well, do we really believe that Chinese leadership isn’t alert to this strategic windfall, this exponential expansion of the so-called “China lobby” in the United States? Do we really think that the CCP is not trying to load up our markets with Chinese corporate securities and sovereign bonds to foster a co-dependency which can soon translate into extortion? They have already deterred Treasury from protecting our national security and made them more worried about investor losses. I am not making this up. Think about it. So this is what you are seeing, Bob. You are seeing this veritable flood taking place because they know that the more of their paper they can get into the portfolios of average American investors, the more leverage they will have, and they will wait patiently but the day will come when they use it. And you can be sure that they were whispering in the ear of the previous Treasury Department as well with some menacing ideas and thoughts.

So it is a dangerous gambit in our capital markets and it is going to require leadership. And Bob, you know what it was like for Ronald Reagan when almost everyone around him felt that the Soviet Union was an invincible juggernaut that was somehow destined to be a permanent fixture on the geopolitical landscape. President Reagan said no, I don’t accept that. He asserted that the Soviets had no true entrepreneurship. They had no free markets. They had no competitive environment to promote greater efficiencies. They had no innovation. They had no technological dynamism.

In short, Reagan believed that the USSR was a fraud economically and financially, that could only reverse engineer our equipment and technology, and not create their own.

He wasn’t wrong.

He looked at the Kremlin’s total hard currency income. You know what he saw? Only some $32 billion dollars a year total in hard currency, 80 percent of which was comprised of oil, gas, arms, and gold; 66 percent just oil and gas — then and now. He also witnessed Western governments and banks financing the entirety of its roughly $16 billion annual hard currency deficit — the amount they spent more than they made. He was appalled to learn that we in the West were financing one hundred percent of the Soviet Union’s annual hard currency shortfall, that coincidentally was the estimated cost — at least hard currency cost — of their global empire at the time, stretching from Havana to Hanoi.

Bob Reilly:

Roger, you mentioned President Reagan’s and your keen appreciation for the vulnerabilities of the Soviet Union. In terms of China, you mentioned during your talk that its soft underbelly is its dependence on the dollar and the American capital markets. Could you speak to any other vulnerabilities you think it has in economic, financial and banking terms?

Roger Robinson:

I sure can. Look, I think we could come up with a few here, Bob. I mean look at the property bubble in China. Overall, the real estate sector constitutes about 25% or so of their GDP. If that huge sector starts to go wrong, and you know it is hanging on a precipice now, there would be a fairly devastating cascading effect. They are presently trying to roll over bad debt that has little to no chance of ever being repaid. The provincial governments, as you know, overbuilt to a fare-thee-well, you’ve seen the videos of ghost cities where there are no residents and so forth.

The corporate bonds of state-controlled enterprises are starting to default now. Now, that is tricky because the markets thought that the Communist Party would stand behind those bonds and that they’d not be permitted to fail because it could implicate the creditworthiness of the country itself. Well, the CCP tested it and now feels that they can let them default without any dire consequences.

Indeed, the Chinese bond market is their kind of last bastion of liquidity. You remember what happened to their stock market in the summer of 2015 when they had that epic meltdown. The CCP had basically told the Chinese people that there was only a one-way trip “up” if they put their life savings into their equities markets. Well, of course, that bubble burst and it started to go down. And when it did, people panicked and market regulators responded by putting a halt to short selling and even stopped the ability of Chinese retail investors to sell their stock in state-owned enterprises. In other words, the public’s money was largely frozen as they watched the market go down, which of course made them panic even more. It was almost comical if it weren’t so sad. It was as though they had followed a handbook of what not to do in a financial crisis.

To some extent, it was almost like they followed a handbook of what not to do in a financial crisis. They were so ham handed. The CCP ended up reinforcing the reputation of the Chinese equities exchange as little more than a casino, hence the overarching importance today of their bond market.

Look at China’s debt structure. I mean what is it today? Some 300 plus percent of GDP and rising? And I don’t think we know the whole story. I mean their debt numbers and non-performing loan numbers are vastly underestimated by design. In short, the CCP is lying. Overall, Bob, it’s a picture of acute vulnerability. It’s a picture that doesn’t withstand the light of day well at all, putting it mildly.

Bob Reilly:

Well, Roger, we know that China has made extraordinary strides over the last 30 years. I have seen those ghost cities, traveling south from Beijing on a high-speed train. It is quite extraordinary and as much progress as they have made and how modern their infrastructure is compared to ours and so forth. You and I both know that their regulated economy is in huge ways a capital allocation and that someday the bill is going to come due for this misallocation despite their crowing about how wonderful and effective their authoritarian model of government is. You cannot misallocate forever. Perhaps we could say that these defaults that they have allowed are some attempt to bring discipline to their markets so that they will pay the bill for these misallocations later rather than sooner.

Roger Robinson:

Well, as you say, Bob, there is no free lunch here. They have made a hash up of capital allocation. The defaults are, in part, because they don’t want to continue spending the money to prop up thousands of failed companies. There are simply too many of them. I mean there’s going to be a steady stream of defaults. Now we can think that that might be discipling, but I can tell you the markets are going to be pretty rattled because they may think that a few being allowed to default is one thing, but if they start to see a cascading effect, it will be quite another and it will start to take the bloom off of the rose that you are seeing now in the IPO market, where they have had an unprecedented flood of IPOs into the U.S. cap markets.

So I think that they are hoping that these defaulted debts will be picked up by the distressed debt market, as it is called, but I don’t see it as sustainable. I think that they’re pushing the day of reckoning down the road, but not that far down the road. There is, in part, why they’re piling into the U.S. capital markets and attracting what funds they can now.

So my feeling is they’re plenty worried about conversations like this one, Bob. A discussion of the money as arguably Beijing’s single greatest vulnerability is the last thing they have in mind. It’s not entirely a coincidence as you can imagine that this capital markets issue area never surfaced in the U.S. policy debate for some twenty years, not until the Spring of 2019. And even then it was not the government that raised it. It was independent, private sector analysts.

So there were many factors in play, going back to the Soviets to cause the demise of the Soviet empire and I have gone through some of them, such as lowering world oil prices, getting the Saudis to pump two million more barrels a year, decontrolling prices at the well-head here — remembering that for every dollar drop of the price of a barrel of oil, the Soviets lost $500 million to $1 billion dollars of that paltry $32 billion a year in total annual hard currency income.

We also went after the twin-strand Siberian gas pipeline, designed to double their hard currency income and take West European dependency on Soviet gas to 75 percent. Now, we killed the second strand of that pipeline. We delayed the first strand by 2–3 years. Sadly, Nord Stream 2, 40 years later is, in effect, the second strand only coming to fruition now. And I hope it doesn’t, but it is close at hand, I fear. The point is that the Soviets didn’t recover. And although they fumbled along for roughly seven years thereafter, it came to a crashing halt.

So President Reagan pulled together this decisive architecture that ended the West’s economic and financial free lunch program for the Kremlin — and some 300 million people were ultimately set free without a shot fired between the superpowers.

Bob Reilly:

Roger, could you comment on the EU’s reaction to the Chinese actions, to the U.S. sanctions, not just U.S, Canada and others? And I have read some EU representatives saying that the Chinese response is going to queer the EU-China trade pact, which has not been ratified by the member nations yet and is, I believe, in a current state of suspension.

Roger Robinson:

Yes, gratefully it is and we better hope it stays there so because if you saw the seven page In Principle EU-China Agreement, which was stampeded through at the close of last year, you’ll notice a phrase in there that really caught my attention. When discussing “discrimination” — one of China’s favorite themes, that they are always being victimized and discriminated against, mind you — that there was language that stated there would be “no investment bans” permitted for the term of the Agreement.

Well, what would that likely mean? It’s hard to know precisely, but it could well mean that the kind of capital market sanctions that we’ve implemented in the United States thus far for national security and human rights concerns cannot be implemented in Europe. European governments, NGOs and the media will likely come to realize soon enough that there are Chinese companies in their nation’s investment portfolios that are aiding and abetting genocide and other egregious human rights and national security abuses. Next and only next they’ll realize that the EU-China Agreement prohibits such firms from being expelled from their markets, which is precisely what China has in mind by the words ‘no investment bans.’ Accordingly, I can’t remotely support the CAI. I would be worried about it if it was even reconfigured because the Chinese have been so skillful in bringing Europe along to date. So let us just hope that that agreement stays on the shelf where it belongs.

Bob Reilly:

Thanks, Roger. Let me see if I can raise another subject and that is the Belt and Road Initiative, which is extraordinarily ambitious on the part of China as it extends through Central Asia, Turkey, and the Middle East. It is even active in Latin America. Can you tie that in with the capital requirements and financing and how are they doing that and does it expose them to some dangers?

Roger Robinson:

I think it is part and parcel of the problem, that’s for sure. I mean you’ve heard about debt trap diplomacy, you know how Sri Lanka lost its most strategic port to China because of indebtedness and the fact that they lost the port, which was collateral for a loan they could not repay. Several African countries are creaking under the pressure of default because of the seemingly generous subsidized loans that accompanied these infrastructure packages and now are non-repayable. The Argentinians and Venezuelans also fell victim to being leveraged by Beijing.

So the point is that China writes these loan agreements very carefully and even anticipates default in some cases, particularly when strategic assets of the targeted country can serve as collateral that can be seized. The CCP designs its proposals to prevail, whether commercially sound or not. When they go to win a deal, they do not hesitate. They simply win it irrespective of the costs and concessions that might have to be made. And it is this kind of below-market pricing that’s their standard operating procedure. It is rather easy to compromise sovereignty of a country and it can be a very quick process. And I am afraid that anybody who plays the game with the Chinese on Belt and Road better have this unfortunate reality in mind.

We have seen this play out in the space sector as well. The CCP and the Russians who pursue a similar game plan in the space domain have created international space partnerships with some 90 countries. Now, I put the word “partnership” in quotes because their idea of a partnership doesn’t have anything remotely to do with what we would consider a special partnership. When they go into a country, it is not merely to help them with space situational awareness or data. No, they’ll provide a satellite — on subsidized financing terms — they’ll launch it for them, they’ll build the ground stations, they’ll provide the operating personnel and training and the list goes on. It’s soup to nuts, a vertically integrated, package deal. That’s how authoritarian countries play the game, particularly Beijing and Moscow.

Now, there are as you can imagine, some non-trivial sticking points here. These 90 countries, and they include big countries like Brazil to Bolivia and Belarus, the countries can get locked into sole source contracts for many years to come. The targeted country’s leadership would also likely be pressed into supporting the Chinese agendas in multilateral fora, especially with regard to Beijing’s desire to control global space standards and norms. They want these countries voting with them. They’re out there collecting partnerships and we don’t even yet know that there’s a problem. We’re not even taking the field yet on the ground-based space race, as I call it. So this is yet another example — because again, it is all part of Belt and Road in the grand scheme of things.

And what PSSI terms “Space Sector Capture” looms for many of these countries, and it is a potentially big step on the path to “nation capture”.

So there is a lot more to say about space, but sadly, this is the way these folks do business under the banner of Belt and Road and foreign companies, to say the least, need to be wary of the CCP representatives bearing gifts.

Bob Reilly:

Roger, you mentioned how encouraged you are by the bipartisan nature of the assessment of China in the U.S. Congress, something we have not seen in many years in terms of U.S. foreign policy, perhaps going back a far as the Cold War. Now, you will remember well that during the Reagan administration there was some opposition to the strength of his foreign policy and his reference to the ‘evil empire’ from the business community itself, which then as it does today, even though the stakes were smaller then, proffered the view that trade leads to peace and so, you know, we ought to be able to trade with the Soviet Union today. Oh, I am sorry, I meant to finish that thought, but the great deal of support for the Reagan foreign policy was received from the U.S. labor unions from Lane Kirkland and others who took very seriously Alexander Solzhenitsyn and the human rights implications of that trade. Have you seen anything similar from the labor unions of the United States today regarding China?

Roger Robinson:

Well, I remember George Meany as well from those days, Bob. I don’t know directly, in the sense that I have not talked to labor representatives of late, both AFL-CIO and Teamsters, although I’ve had dealings with both in the past, but I’ve heard that organized labor is very concerned about the unfair, gratuitous job losses and unfair competition. And I think that is established. I think their instincts call for a great deal of skepticism and even pushback against the CCP, and I think we’re seeing it. They’re a natural ally, it seems to me, in the effort to protect our capital markets from CCP manipulation or abuse, and, in so doing, protect American jobs, values and security.

Time will tell, but I believe that the recent Anchorage meeting that you and I talked about some offline and the belligerent Chinese attitude on display there, was probably quite bracing for the Biden administration. I mean Xi Jinping is a very tough customer, and he tends to make, fortunately, glaring errors in judgment that are ultimately to our advantage. One of them was, for example, Belt and Road being revealed to be the strategic architecture it is, as opposed to a benign commercial undertaking as they initially advertised. There are several other such examples such as re-centralizing their companies and placing Communist Party officials into senior positions

Bob Reilly:

Roger, I would agree with you. I think the open disdain with which Secretary of State Blinken was treated in Anchorage was actually very helpful. As you know U.S public opinion over the past several years has so strongly moved against the Communist Party of China. I have asked China experts why did Xi not just wait for five ten years and then it would be too late for the U.S. to respond? And the answer is always, well, they already think it is too late for the U.S. to respond and that accounts for some of the open belligerence and the open disdain. What remains to be seen is whether they are wrong or not.

Roger Robinson:

The reason I’m smiling is because they’re wrong. Indeed, one would have to go out of their way to make a more debilitating strategic error than this one. President Xi cashiered Deng Xiaoping’s wise counsel of “hide and abide”. Today’s CCP is a far more thuggish event which, fortunately, makes it easy to observe. Going openly toe to toe with the United States? This will later be seen to have been a fateful miscalculation, like the Soviets before them.

Bob Reilly:

Roger Robinson, thank you so much. I am afraid our time is up with this program. Thank you, everyone, for joining us. I encourage you to visit the Westminster Institute webpage. Simply google us, “Westminster Institute,” and you will find an array of videos of our past lectures, a number of which are on China and other human rights issues. And we hope you will stay tuned and join us for future events. Thank you so much.