US report warns over China state firms

by Shaun Tandon, Agence France-Presse

Posted at Nov 15 2012 07:20 AM | Updated as of Nov 15 2012 03:20 PM

WASHINGTON - A US commission on Wednesday urged lawmakers to consider tighter rules on investment by Chinese state-owned firms, warning that they may pose economic as well as security risks.

In an annual report to Congress, the US-China Economic and Security Review Commission also called for efforts to bring China into arms reduction talks due to Beijing's growing expenditure on opaque weapons programs.

Chinese investment abroad has soared over the past decade. The commission concluded that the world's second largest economy will likely look to acquire US companies as it diversifies its more than $3 trillion in foreign reserves.

William Reinsch, the vice chairman of the commission, said that companies in the state sector -- which accounts for up to half of the Chinese economy -- may enjoy unfair advantages through lower costs for labor and financing, as well as preferences in winning contracts at home.

"While foreign investment in America is generally viewed positively because it creates jobs by adding productivity-enhancing capital to skilled US labor, there may be some exceptions to the general rule," he told reporters.

The commission, whose recommendations are not binding, called for Congress to consider adding net economic effects -- such as detriment to US businesses in China -- as a reason to block foreign investments. Under a 37-year-old system, the United States can prevent projects for security reasons.

At least 11 nations -- including Australia, Canada and China itself -- already look at economic effects when assessing foreign investment, the report said.

The commission also recommended that Congress increase disclosure requirements for state-owned companies that seek to be listed on US stock exchanges.

The report comes one month after the House Intelligence Committee urged that Chinese telecom firms Huawei and ZTE be excluded from US government contracts and acquisitions, warning that their equipment could be used for spying.

Security fears also led President Barack Obama in September to block a private Chinese company from building a wind farm near a military site in Oregon and helped scuttle a 2005 bid by state-owned China National Offshore Oil Corp to take over former US oil giant Unocal.

China has accused the United States of protectionism and warned that efforts to prevent or regulate investment would curb the enthusiasm of companies eyeing the world's largest economy.

The Obama administration has repeatedly pushed China over its state-owned enterprises, demanding equal treatment for US companies seeking contracts in the Asian giant, but has said that it supports Chinese investment.

The commission also called for Congress to conduct hearings on China's cyber espionage and to release findings to the public. US studies have warned that China is ramping up its capability for cyber warfare, which is sometimes carried out by hackers with loose ties to Beijing.

The report said that China was also rapidly increasing traditional military capabilities and its nuclear arsenal, including developing a so-called triad that would allow Beijing to deliver nuclear weapons by land, submarines and the air.

"China is on the cusp, perhaps within two years, of attaining a true 'nuclear triad,'" the report said.

China has long faced calls from the United States and its allies for more transparency. Estimates range widely on China's arsenal, with different experts saying Beijing possesses anywhere from 166 to 1,800 nuclear weapons.

The commission called for US officials to bring China into international talks on arms reduction. Such negotiations are now largely bilateral affairs between the United States and Russia, which hold far larger arsenals.

If the Chinese "are going to upend the entire arms control regime that currently exists, they need to be brought into some kind of a dialogue to develop some kind of understanding as to where we're all going together on arms," said Richard D'Amato, a commissioner on the panel.

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