Knowing What State-Owned China Firms Are About Is No Simple Matter

After operating in the U.S. for two decades in relative anonymity, China’s largest shipping company can’t stay out of the spotlight.

First, Congress prevented it from expanding onto the shuttered Navy base at the Port of Long Beach. Now, China Ocean Shipping Co., also known as Cosco, finds itself on a list of firms that China’s critics want to banish from the U.S. capital and stock markets.

In their eyes, Cosco is just one example of a unique kind of state-owned enterprise that China uses as a Trojan horse--a front for an organization that conducts covert activities in the U.S.

Among other things, the Cosco flap prompted accusations that China is infiltrating the U.S. business community to acquire sensitive technology or smuggle arms and is using U.S. capital markets to raise money to fund its military or promote terrorism.

“Twenty-first century national security is moving away from traditional political-military concerns into more arcane, complex abuses of the otherwise legitimate international financial and trading system,” says Roger Robinson, a former National Security Council official who now works at Washington’s Center for Security Policy.

Yet a Rand Corp. study concluded that Cosco was a purely commercial venture, run by civilians, and that the same appears to hold true for most state-owned Chinese firms operating here.

Cosco, for example, is one of the world’s largest shipping lines and carries close to one-fifth of the cargo between here and China. It calls on 10 U.S. ports, including Long Beach and Oakland.

Stephen Yates, a senior policy analyst at the conservative Heritage Foundation think tank, says it is virtually impossible to finger the Chinese military-owned firms without harming legitimate business and violating the rights of innocent Asian Americans.

“People can change identities as much as they change the names of their companies, and then you mix that with the problem of [ethnic] identity,” says Yates, who has researched this issue for congressional critics of China. “As much as I support the principle, there is no simple way, not even a modestly complicated way, to solve this problem.”

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Cosco’s troubles are proof of how quickly U.S. attitudes toward China, or things Chinese, can turn ugly. And Chinese doing business here say that’s a big reason they use American-sounding names and shell companies to obscure their origins.

“People are afraid of being identified as being from mainland China after the Cosco thing,” says Eddie Chao, a partner in Financial Capital Investment Co., a Los Angeles real estate firm whose clients include mainland Chinese investors.

The latest alarms about these unusual enterprises were sounded this yearby a congressional committee chaired by Rep. Christopher Cox (R-Newport Beach), claiming that as many as 3,000 Chinese government-owned firms could be acting as fronts for the Chinese People’s Liberation Army.

The suspect firms include Cosco; China International Trust & Investment Co. (Citic); the Poly Group, the arms trading company of the PLA; China North Industries Corp. (Norinco), an umbrella group overseeing at least 157 Chinese tank, artillery and small arms factories; and China Telecom-Great Wall Mobile Telecommunications, a joint-venture firm affiliated with the PLA.

Unhappy congressional leaders have proposed the establishment of an office of national security in the U.S. Securities and Exchange Commission aimed at keeping companies with links to the Chinese military out of the U.S. stock and bond markets.

Some of the most prominent U.S. brokerages and pension funds have invested in these Chinese firms, including Templeton Asset Management, Smith Barney and the California Public Employees’ Retirement System.

CalPERS, the nation’s largest pension fund with $159 billion in assets, has invested about $30 million in Citic Pacific, Cosco Pacific and China Resource Holdings, a conglomerate that has attracted criticism.

CalPERS spokeswoman Pat Macht says evaluating the “national security risk” of a foreign firm is the job of the U.S. government, not fund managers.

“If the federal government had a ban on investing in Communist China, we wouldn’t,” she says. “But short of the government having a ban, it’s very difficult for any investor to know who are the good guys and who are not the good guys.”

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Indeed, even identifying Chinese military-affiliated firms is difficult. China’s military-industrial complex makes the corporate-Pentagon links of the Cold War era look like a cottage industry. The Chinese army ultimately controls an estimated 15,000 businesses, ranging from travel agencies to huge conglomerates.

Last year, Congress passed a law requiring the U.S. government to publicly identify by last January all companies operating here that are controlled by the PLA. But the Pentagon has yet to release that list, claiming it is still trying to find a way to comply without violating privacy laws or revealing intelligence secrets.

James Mulvenon, a leading U.S. expert on the Chinese military, argues the threat posed by Chinese companies in the U.S. has been grossly exaggerated. He estimates there are fewer than two dozen military-related companies operating in the U.S., including the subsidiaries of Poly, Norinco or China Xinxing (Group) General Corp., which is owned by the PLA’s General Logistics Department.

Mulvenon, a researcher at Rand’s Washington office, agrees there are legitimate concerns about China’s illegal acquisition of advanced technology and about arms smuggling. But he says the greatest threat to America’s technological mother lode comes from U.S. firms transferring sensitive technology to their Chinese business partners.

“What we found with these [Chinese] military and defense-industrial companies is that in fact, these companies are dedicated to making money,” he says. “And many of them are hanging on by their fingernails.”

Mulvenon is particularly dismissive of efforts to label Cosco and CITIC, China’s leading investment firm, as fronts for the military.

CITIC’s Hong Kong subsidiary, CITIC Pacific, is one of the former colony’s leading real estate developers and owns large stakes in Cathay Pacific and CLP Holdings Ltd., the largest investor-owned electric utility outside of Japan.

CITIC drew the attention of China’s critics three years ago because Wang Jun, a CITIC director, is also chairman of China-based Poly Group. In 1996, a Poly subsidiary, Poly Technologies Ltd., was accused of attempting to smuggle 2,000 Chinese assault rifles into the United States on a Cosco vessel. When charges were filed that August, Poly’s officials fled and closed their U.S. offices.

That same year, Wang visited the White House for one of President Clinton’s now infamous coffee chats with campaign contributors. That meeting later came under scrutiny when the president and his Democratic supporters were accused of selling access to the White House in exchange for illegal contributions from foreign nationals.

But Mulvenon, who conducted a study on the Chinese military in the U.S., argues that Wang’s role in the Poly Group is “titular” and his CITIC activities are “overwhelmingly civilian in nature.”

Not so, say Reps. Duncan Hunter and Randy “Duke” Cunningham, both San Diego-area Republicans, and Sen. James M. Inhofe (R-Okla.).

Hunter, who describes Cosco as the “merchant marine for the Chinese military,” says U.S. businesspeople have been blinded by their greed.

“When you’re trying to stop technology from going to countries that can use it against you on the battlefield, the biggest adversary is people who are making profits from the transfer,” he says.

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Two years ago, the three lawmakers launched the ultimately successful campaign to prevent Cosco from leasing the shuttered Navy base at the Port of Long Beach to build a new container terminal.

They said Cosco could use the terminal as a base for spying in the U.S., particularly for the “interception of American military intelligence.”

As evidence of Cosco’s alleged covert activities, they cited several incidents around the world, including the 1996 Poly Technologies smuggling case, in which Comsco vessels were alleged to have transported illegally purchased materials or weapons components to Chinese allies.

Under U.S. law, shipping lines are not held liable for verifying the contents of their containers, which are sealed before they are put on board. Cosco was not charged in the 1996 smuggling case. An aide to Hunter was unable to find evidence that Cosco has been charged in such incidents in other countries.

As for Cosco’s bid to expand in Long Beach, a Department of Defense review concluded that it raised “no significant national security concerns.”

Although Cosco has been allocated additional cargo handling space so it can maintain its expanding operations in Long Beach, company officials say the high-profile battle scared off some customers and has jeopardized the shipping line’s plans to establish its own terminal in the U.S.

Several other U.S. ports, including Los Angeles and Seattle, have offered space. But Cosco’s opponents have vowed to stop the shipping line from trying to acquire terminal space elsewhere.

Meanwhile, the Port of Long Beach is still trying to find a tenant for the vacated Navy property. And Cosco’s vessels continue to sail in and out of the harbor as they have for 18 years.