New Study Warns Against Underwriting Deceptively Marketed Chinese Sovereign Bonds
November 3, 2020
WASHINGTON, D.C.— The Committee on the Present Danger: China (CPDC) today welcomed the collapse of an Initial Public Offering by the Ant Technology Group in both Hong Kong and Shanghai. It turns out that shortfalls in material risk disclosure, financial irregularities and bad blood between Chinese dictator Xi Jinping and Alibaba founder Jack Ma (the largest shareholder in Ant), combined with the concerted efforts of the CPDC (see, for example, here and here), outside research providers like RWR Advisory Group, as well as several senior Trump Administration officials to make this much-touted, history-making IPO “a bridge too far” for the CCP at this time. As a result, a huge number of American retail investors have been spared the presence of yet-another Chinese “bad actor” in their investment portfolios.
This development reinforces the bottom line of a new and damning analysis by RWR Advisory concerning Wall Street’s intensifying—and treacherous—efforts to enable the Chinese Communist Party’s oppression at home and unrestricted warfare against the United States. “The Risk Exposure of U.S. Investors Holding Chinese Sovereign Bonds” is the latest in a series of pathbreaking research products by that independent research firm that describe the various means by which America’s investors are being induced to help our most dangerous enemy in underwriting, among other things: its Orwellian surveillance-state operations; concentration camps; forced labor; South China Sea bastion-construction; “Belt and Road” debt-trap colonial empire-building; and an immense military buildup with the financial portfolios of mostly unwitting U.S. investors.
Specifically, “Beijing’s Bankers” in the United States are causing Americans who used to flock to purchase Liberty Bonds to support our country’s war efforts, to buy up “liberty-destroying bonds” through their mutual funds, pensions, emerging market index-pegged Exchange-Traded Funds, etc. Worse yet, these investors are thereby made vulnerable to coercive pressure from the CCP, thanks to their financial exposure to its wholly unaccountable companies and the Party’s good will.
Highlights of the new RWR Advisory risk assessment include the following (emphasis added throughout):
- “China’s Ministry of Finance issued $6 billion of U.S. dollar-denominated sovereign debt in Hong Kong on October 14. The round was oversubscribed to 4.7 times the original amount, attracting $27.2 billion in investment. U.S. investors accounted for $4.2 billion, or about 15% of the latest sale, including nearly half (47%) of the 30-year bond offering, at some $235 million alone. Several U.S. investment banks were lead bookrunners for the sale, including: Bank of America Securities, Citigroup, and units of J.P. Morgan Chase and Goldman Sachs.”
- “For the first time, Chinese sovereign debt was marketed directly to U.S. institutional investors by the Chinese Ministry of Finance, as opposed to using institutional intermediaries, a strategy likely intended to pave the way for several similar issuances in the period ahead.”
- “Chinese dollar-denominated bonds were sold in both the 144a format (which allows foreign debt to be sold to U.S. investors) and in the Regulation-S format, a regulatory framework (read: loophole) for international debt offerings that carries limited disclosure requirements, for the first time in almost 25 years. The Chinese government had not issued dollar bonds in the 144a format since 1996. This combined offering format opens direct access by Beijing to the undisciplined cash of American retail and institutional investors.”
- “The issuance of Chinese sovereign debt is effectively the exchange of an IOU from Beijing for billions of U.S. dollars to be spent at the sole discretion of the Chinese government and the ruling Chinese Communist Party (CCP). This has earned them the moniker of ‘CCP Bonds.’”
- “Funding the projects and purposes of the CCP – including, for example, the construction and/or equipping of concentration camps and elaborate surveillance networks being used to oppress the populations of Xinjiang and Tibet, the militarizing of Beijing’s illegal islands in the South China Sea, the funding of nuclear ICBMs and SLBMs targeting American cities and other advanced PLA weapons systems – carries obvious and formidable national security, human rights and fiduciary risks for U.S. investors. Despite this risk, China has faced little, if any, push-back on its sale of U.S. dollar-denominated bonds in international markets, including in the United States.”
Particularly noteworthy is this finding that reveals the potentially fraudulent nature of the CCP’s bond offerings:
- “China’s bond market rating system, which relies mostly on domestic rating firms (including Chinese subsidiaries of S&P and Fitch), and is based on a different methodology than the internationally established standard, has been found to award triple-A ratings on an unjustified, outsized basis. Whereas Triple-A ratings are reserved in many other countries for only the strongest established debt issuers, China’s skewed ratings scale consistently upgrades ratings on the debt of state-owned enterprises and those controlled by local governments. Several case studies published in the Wall Street Journal demonstrate that the Chinese government is manipulating the debt market as a tool to finance CCP and government spending.”
The material risks associated with CCP bonds make all the more stupefying the scale at which U.S. investors are acquiring them—in the process, bailing out the Chinese Communist Party, as well as enabling its predations. A sense of the magnitude of these purchases can be found in the following data from this new risk assessment:
- “Chinese debt has been added to major global bond indexes over the past year, greatly expanding U.S. and foreign investor exposure while deepening China’s access to the hundreds of billions of U.S. dollars benchmarked against them.”
“China’s RMB-denominated government and policy bank securities were added to the Bloomberg Barclays Global Aggregate Bond Index on April 1, 2019, in a move that was estimated to have steered about $120 billion into China’s onshore bond market, according to Deutsche Bank strategists. The inclusion of 363 Chinese securities represents 6.03% of the $54.07 trillion index (the amount of total bond issuances outstanding).”
- “JP Morgan began including Chinese sovereign debt in its dollar-denominated Government Bond Index Emerging Markets (GBI-EM) family of indexes in February 2020. The inclusion period for the nine eligible Chinese bonds will end in December of this year. With the addition of three bonds from the latest tranche, the GBI-EM Diversified Index, which has $202 billion benchmarked against it, will be weighted 10% to China and direct billions of dollars into China’s bond market.”
“FTSE Russell became the latest major index provider to announce its intention to include China bonds (one year after deciding against such inclusion) when it announced on September 24, 2020 that it plans to add Chinese government debt to its flagship World Government Bond Index beginning in October of next year. The addition of Chinese debt to the benchmark may add as much as $170 billion to China’s bond market by the end of 2022, according to a Standard Chartered Bank estimate.”
The Committee on the Present Danger: China believes that such unrestricted underwriting of a regime that has declared and been waging “people’s war” against the United States is strategically suicidal. It is, moreover, financially irresponsible. The Committee calls on President Trump – who has in his own right and through senior subordinates, including National Economic Council Director Lawrence Kudlow, National Security Advisor Robert O’Brien and Labor Secretary Eugene Scalia – made clear the inadvisability of investing in the Chinese Communist Party and its various front companies to act forthwith to preclude such reckless behavior pursuant to his authority under the International Economic Emergency Powers Act (IEEPA).
To interview representatives of the Committee on the Present Danger: China, contact
Media@HamiltonStrategies.com, Beth Harrison, 610.584.1096, ext. 105, or Deborah Hamilton, ext. 102.