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US Warns on China Loans, But Takes Them11/18 06:14
WASHINGTON (AP) -- For years, Washington has been warning others not to
trust loans from Chinese state banks fueling its rise as a superpower. But a
new report reveals an ironic twist: The United States is the biggest recipient
of all -- by far. And the security and technology implications have yet to be
fully understood.
China's state lenders have funneled $200 billion into U.S. businesses for a
quarter of a century, but many of the loans have been kept secret because the
money was first routed through shell companies in the Cayman Islands, Bermuda,
Delaware and elsewhere that helped obscure their origins, according to AidData,
a research lab at the College of William & Mary in Virginia.
More alarming, much of the lending was to help Chinese companies buy stakes
in U.S. businesses, many tied to critical technology and national security,
including a robotics maker, a semiconductor company and a biotech firm.
The report found a far more widespread and sophisticated lending network
than previously thought -- a web of financial obligations extending beyond
developing countries to rich ones, including the U.K., Germany, Australia, the
Netherlands and other U.S. allies.
"China was playing chess while the rest of us were playing checkers," said
former White House investment adviser William Henagan, who worries the hidden
lending has given China a chokehold on technologies. "Wars will be won or lost
based on whether you can control products critical to running an economy."
China money gets a closer look
While the U.S. still welcomes most foreign investment -- and President
Donald Trump has courted it -- money from China has drawn particular scrutiny
as the world's two biggest economies with opposing ideologies battle for global
supremacy.
Deals financed by China's state-owned banks, the ones studied in the AidData
report, are especially problematic. The lenders are controlled by China's
central government and the Communist Party's Central Financial Commission, and
they are directed to advance China's strategic goals.
In total, the AidData report found China lent more than $2 trillion from
2000 through 2023 around the world, double the highest previous estimates and a
surprise to even longtime analysts of China's rise. And much of the lending to
wealthy countries was focused on critical minerals and high-tech assets -- rare
earths and semiconductors needed for fighter jets, submarines, radar systems,
precision-guided missiles and telecom networks.
"The U.S., under both (former President Joe) Biden and Trump, have been
beating this drum for more than a decade that Beijing is a predatory lender,"
said Brad Parks, executive director of AidData. "The irony is very rich."
Shell games
Until now, a full accounting of China's state lending has never been
published because much of the financing is buried beneath layers of secrecy,
masked by Western-sounding shell companies and mislabeled by international
databases as ordinary private financing.
"There is a complete lack of transparency that speaks to the lengths to
which China goes, whether through shell companies or confidentiality agreements
or redactions, to make it extremely difficult to come up with this full
picture," said Scott Nathan, the former head of the U.S. International
Development Finance Corp., an agency set up in the first Trump term to invest
in foreign projects deemed in the U.S. national interest.
Since the report's last documented loan in 2023, U.S. scrutiny has gotten
better. Screening mechanisms, such as the interagency Committee on Foreign
Investment in the U.S., got beefed up in 2020 to protect sensitive sectors in
the economy.
But China has gotten better, too, in part by setting up banks and branches
overseas -- more than 100 in recent years -- that then lend to offshore
entities, further clouding the origins of the money.
"In places where there are more cops on the beat," Parks said, "it has found
ways to work around barriers to entry."
Where the loans ended up
Chinese state bank financing has touched projects across the U.S.,
particularly in the Northeast, the Great Lakes region, the West Coast and along
the Gulf of Mexico, which Trump has renamed the Gulf of America. Many loans
targeted critical high-tech industries, according to the report.
-- In 2015, for instance, Chinese state-owned banks lent $1.2 billion to a
private Chinese business to buy an 80% stake in Ironshore, a U.S. insurer whose
clients included the Central Intelligence Agency and Federal Bureau of
Investigation officials and undercover agents who might need help paying legal
bills in case they got into trouble in their jobs.
U.S. regulators were unaware of the Chinese government involvement because
the financing was funneled through a Cayman Island business with no obvious
ties to China, according to the report. U.S. officials later realized the
Chinese government could access information and ordered the Chinese buyer to
divest.
-- That same year, the Chinese government published "Made in China 2025," a
list of 10 high-tech areas, such as semiconductors, biotechnology and robotics,
where it wanted to reach 70% self-sufficiency within a decade. The next year,
in 2016, the Export--Import Bank of China, a policy bank, provided $150 million
in loans to help a Chinese company buy a robotics equipment company in Michigan.
After China's adoption of the manufacturing master plan, the percentage of
projects targeting sensitive sectors such as robotics, defense, quantum
computing and biotechnology rose from 46% to 88% of China's portfolio for
cross-border acquisition lending, according to AidData.
-- In 2017, a Delaware private equity firm using a Cayman Islands company
tried to buy a U.S. chip maker; the deal was blocked when investigators
discovered both companies were owned by a Chinese state-owned enterprise. That
same Delaware company successfully bought a U.K. semiconductor maker that had
to be divested when British authorities found out.
-- And in 2022, the U.K. forced a Chinese company to divest another
sensitive British firm in the industry, a designer of chips in Apple phones but
potentially adaptable for military systems. The Chinese company had bought it
through a company in the Netherlands that they owned. That Dutch firm is now
accused of withholding semiconductors vital to automakers in the U.S.-China
trade war.
Following the money
To trace China's hidden lending, AidData dug through regulatory filings,
private contracts and stock exchange disclosures in more than 200 countries
written in multiple languages.
The effort to track China's state loans and investment started more than a
decade ago when Beijing launched its Belt & Road Initiative to build
infrastructure in developing countries. The project expanded sharply three
years ago when the AidData team, which eventually grew to 140 researchers,
realized many of the loans were landing in advanced economies such as the U.S.,
Australia, the Netherlands and Portugal, where acquisitions could allow it to
access technology that Beijing considers essential to its global rise.
The report says the findings show a shift in the use of state credit from
promoting economic development and social welfare to gaining geo-economic
advantages.
"There's global concern that this is part of a concerted effort to gain
control over economic chokepoints and use this leverage," said Brad Setser, an
adviser to the U.S. Trade Representative in the Biden administration. "It's
important that we understand what they're doing, and they don't make it easy."
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