Made in China

Congressional Report: Chinese government-controlled enterprises threaten U.S., world economy

November 13, 2012

China’s government-controlled enterprises are targeting the U.S. market and pose a threat to U.S. companies, free markets, and fair trade, according to a forthcoming report by a congressional Chinese commission.

'The Chinese system of state capitalism or ‘capitalism with Chinese characteristics’ has blocked many of the potential benefits of a free market, not only in China, but among China’s trading partners," concluded a draft report by the U.S.-China Economic and Security Review Commission.

'The state-owned sector in China can undercut prices charged by privately held competitors globally due to a variety of subsidies granted by the Chinese government: low-interest-rate loans; below-market-rate land, fuel, and electricity; special exemptions from environmental and labor regulations; tax abatements and preferences."

Some 28 states and U.S. cities opened economic development offices in China and at least eight state governors led trade and investment missions to China, the report said.

Chinese investment in the United States is growing and includes some money from Communist-controlled companies.

'Many of the industrial policy goals of China’s investment could harm segments of the most important U.S. industries," said the draft report by the U.S.-China Economic and Security Review Commission.

'For example, China’s emphasis on obtaining technology could damage domestic and foreign sales of U.S. information and communications and aerospace industries."

Chinese foreign direct investment in the United States is low: just $1.3 billion in 2010 compared to $67.5 billion worth of investment in the rest of the world.

However, China has targeted the U.S. for investment and is using its $3.24 trillion in currency reserves to enter the market.

The entry of Chinese state-run companies in the United States would allow the subsidized Chinese firms to sell products and services at less than the cost of production.

'Once their U.S. competitors are driven out of the business, Chinese [state-owned enterprises] might dominate the market and even raise prices," the report said.

The report calls for getting tough with China on its state-controlled businesses by imposing 'reciprocal treatment" for Chinese companies that match restrictions on U.S. companies in China.

The commission also recommends expanding the mandate of the Treasury Department-led Committee on Foreign Investment in the United States to check the economic benefit of Chinese investment in the United States and requiring China to disclose government support and pricing practices used by its companies.

Also, the U.S. government should increase the enforcement of illegal subsidies by China to its state-owned companies in violation of World Trade Organization rules.

'The rise of state involvement in the global economic arena is a significant threat to our free market system and the free flow of private capital," Timothy Brightbill, a Washington attorney specializing in trade cases, told the commission. 'The influence of many of these state-supported enterprises is not declining in China; it is expanding."

The commission reveals in its chapter on Chinese state-controlled enterprises that China’s communist government controls trillions in investment through a 'troika" of state-run companies, government entities, and ruling Communist Party leaders.

'Government corporations provide the means for the central government to designate and control critically important segments of the economy, such as steelmaking, information technology, aerospace, and finance," the report said. 'At the same time, the government employs its corporations to advance its foreign policy objectives and international commercial interests."

The report said that since 2008, in response to the global financial crisis, China has tightened controls over its so-called 'state capitalism" in violation of promised economic reforms that Beijing said would follow its controversial membership in the World Trade Organization.

A little-known Chinese organ called the State-owned Assets Supervision and Administration Commission (SASAC) controls the largest of China’s 121 non-financial government-owned firms. The SASAC reports directly to the Chinese government State Council that is similar to the U.S. government cabinet.

'This makes SASAC the world’s largest and most powerful holding company and concentrates the economic and political power of the government industries," the report said, noting the SASAC controls $1 trillion in state-controlled assets.

The government-owned companies involved include large telecommunications, aviation, energy, and construction companies.

Senior Communist Party members determine the membership of the companies’ boards of directors and management.

The top 130 leaders of large state-owned companies are all Party members and 20 served on the ruling Politburo. State-owned telecom and oil companies all were given new Party leaders in 2004 and 2011 respectively.

Additionally, state-owned banks in China are used to boost the state-owned and controlled companies.

Between 40 percent and 50 percent of China’s economy is the result of state-owned enterprises, the report said.

Beijing has a group of seven 'strategic" and five 'heavyweight" industries over which it maintains absolute control. The strategic industries are armaments; power generation and distribution; oil and petrochemicals; telecommunications; coal; civil aviation; and shipping.

Heavyweight industries are machinery; automobiles; information technology; construction; and iron and steel and non-ferrous metals.

The heavyweights are permitted to have some private and foreign ownership.

U.S. companies seeking to do business in China face discriminatory trade practices by the government-controlled companies, the report said.

Also, some 80 percent of the software used in Chinese government offices are 'pirated software" and government-owned Chinese companies also are using stolen software, the report said.

'U.S. companies face unfair competition from Chinese SOEs within China, within the United States, and in third country markets," the report concluded.

Published under: China , Investment