U.S. China Economic Security Review Commission wants to slow down China's IPO Tech Bandwagon

Filed in archive Law on August 24, 2005

Last night, on a broadcast of C-Span, I observed Howard Chao, a senior partner with O'Melveny & Myers confidently answer questions posed by the U.S.China Economic Security Review Commission on China and Capital Markets in a sparsely attended public hearing held on August 11 at the Dirksen Senate office building Washington, D.C. The Commission seeks to better understand the strategy and objectives employed by Chinese firms as they seek to raise capital in global capital markets.

In response to the Commission's expressed concerns that the Chinese government's roadmap for an ever increasing number of selected high tech IPOs on Nasdaq might undermine and pose a direct challenge to U.S. competitiveness in technology development, Chao, a capable international attorney, stated bluntly that "China does not need to come here to raise capital on Nasdaq, they are already flush with capital."

It was only one year ago that the members of the Commission including co-chairmen, C. Richard D'Amato and Roger W. Robinson Jr., expressed serious concern over American venture capitalists funding support for Chinese tech companies, including arguably discouraging law firms like O'Melveny & Myers from even gaining listing support for any Chinese tech companies.

I have yet to read this year's recently released report but less than one year ago, this same Commission made these recommendations:

* Congress should bar U.S. institutional or private investors from making debt or equity investments, directly or indirectly, in firms identified and sanctioned by the U.S. government for weapons proliferation-related activities, whether they are listed and traded in the United States or in the Chinese or other international capital markets."

* What China does with its growing technology capabilities - whether it converts them to military uses and/or to control the free flow of information to its population - is of direct national security concern to the United States. Moreover, the extent to which these advances allow China to challenge U.S. competitiveness in technology development is a vital matter for U.S. economic security.

In the opening statement made at this month's hearing by chairman C. Richard D'Amato, the onerous brakes are now squarely placed on any possible Chinese plans to access U.S. capital markets.

"As Chinese financial institutions prepare for an estimated combined $15 billion in listings, questions need to be raised regarding the loan portfolios of these institutions. I am concerned that U.S. investors may not have sufficient information to make informed decisions about the risk of these investments. Furthermore, the possible links between listed state-run firms and banks and China's military industrial complex has here-to-for lacked comprehensive examination," says D'Amato.

After all the buzz on China related to Baidu and Google's deal with Alibaba, few are in doubt any longer that the Chinese are capable of launching high-tech companies that are innovating brilliantly and understand the capital markets. The facts are crystal clear: China is one of the world's most promising end markets for technology, while America may have already reached a consumption saturation point. So the real issue for the remainder of the decade isn't whether China workers will steal our high-tech jobs; or American venture capital investment funds SOEs that lack transparency, or that semiconductor manufacturing will be taken from Silicon valley. It may simply be a genuine fear that China's widening middle class high-tech consumers will not buy our own products.

I do encourage a close reading of the recent testimony and the final 2005 report.