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Who Owns the Pacific Bravo?

Who Owns the Pacific Bravo?

Robert Spalding

What does globalization mean for national security? This is a question the U.S. government’s National Security Strategy (NSS)—a document that outlines both threats to the United States and the strategy to address them attempted to answer, but it seems many have misunderstood the conclusions. What makes the current NSS different from previous versions is the recognition that traditional threats aren’t solely what the U.S. should be worried about. We can be damaged in an economic and financial sense in a manner that weakens the country just as significantly as a military attack.

It is conventional wisdom that hostile governments spend their own money on military capabilities that the military must consider when designing a counter strategy. To compensate, the American taxpayer is tapped to support a military force that can defend our nation or deter conflict. When considering the financial source of China’s military buildup and its various activities that undermine our national security, the U.S. should be looking much closer to home. The People’s Republic of China built the islands in the South China Sea, but American institutional investors also financed the work. In other words, Americans’ retirement funds.

How does this happen? Principally in two ways. First, stocks of Chinese companies are repackaged into American Depository Receipts that are then denominated in U.S. dollars and traded on the New York Stock Exchange (NYSE) just like IBM, JP Morgan, or Ford. This makes it extremely easy for U.S. investors to unknowingly fund these Chinese companies.

Second, China has successfully lobbied for the inclusion of Chinese stocks and bonds in global investment indices such as the MSCI Emerging Markets Equity Index and the Bloomberg Global Aggregate Index, amongst others. These inclusions will effectively force hundreds of billions of dollars of Americans’ retirement savings to be funneled into China.

This is very troubling. China does not have the investment safeguards nor accounting standards that are necessary to protect the savings of Americans. This capital can either directly or indirectly fund activities that are contrary to America’s, and indeed the world’s, security. For example, last year Western investors unwittingly financed the construction of a Chinese aircraft carrier.

Our government’s recent warning to Hong Kong about Pacific Bravo warrants some scrutiny. We have warned that the tanker is carrying illicit Iranian oil, sold and exported in contravention of U.S. sanctions, and should not be allowed to dock. The question the NSS would have security practitioners ask is this: Is the tanker owned by a wayward company in China that is acting criminally, or is there something more here? Is the state involved?

People who understand the Chinese Communist Party recognize it functions as the de facto sovereign in China and exercises total control over both the government and broader society, including China’s corporations. Others—who have grown accustomed to the Western system of limited government, separation of powers, private property, and corporations which solely look to maximize shareholder returns—have difficulty appreciating that Chinese corporations, which may possess many of the features of Western corporations, ultimately function as agents of the Party.

Based on a thorough survey of financial data it appears that Bank of Kunlun, and thus the Pacific Bravo, is part of the larger China National Petroleum Corporation (CNPC) complex (see Fig. 1). Within this structure, there are three companies with listed equities, and seven companies that issue bonds. The USD denominated bonds appear to have been underwritten by bulge-bracket U.S. investment banks.

Since Pacific Bravo is clearly a state-owned enterprise, likely, the Chinese government is deliberately violating U.S. sanctions and abusing our capital markets to do so. Typically, the company would be held responsible for the violation. The NSS was premised on the fact that the People’s Republic of China is in violation of U.S. and international law, and to both preserve our democracy and the liberal international order this behavior must be addressed.

Law enforcement is insufficient to deal with a nation-state perpetrator, committing what the U.S. currently considers a crime. Recognizing the nature of the Chinese state, as well as identifying the Party ultimately responsible for illegal behavior, then applying a systemic punishment that fits the perpetrator is largely the goal of the current trade negotiations.

In the case of the Pacific Bravo, however, it is clear something more is required. Just as all state-owned enterprises in China are agents of the Party, all of CNPC’s operations and entities are the same. It is unconscionable that several of CNPC’s entities have access to capital from U.S. savers while another entity is flagrantly violating our laws. The Treasury, SEC, and NYSE must coordinate with the government’s national security agencies and remedy this abuse.

Read in RealClear Defense.

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