Conflicts of Interest,
Conflicts of Finance

By Evan Anderson


Click to review SNS: Disengagement: An Introduction (9/23/21); Part I: The Economics of a Secure Future (10/22/21); Part II: The Cost of Trade (11/10/21); and Part III: Tech at War (1/19/22).


"If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed." - Edmund Burke

"blood money: 1: money obtained at the cost of another's life [....] The blood money earned by people who profited from the tragedy." - Merriam-Webster


In "SNS: Part III: Tech at War," we covered the perils of China's currency policy, technology theft and transfer, compromise of the US academic system, and other economic warfare policies. The comprehensive package of economic warfare tactics employed by the government of the People's Republic of China (PRC) is impressive. Not impressive is that we across the free world are financing it.

There is something uniquely ill-advised about financing one's enemies.

In 2018, I attended a meeting of investors in which a man (whose name I don't recall) spoke about business opportunities in China. For an hour over lunch, this individual described the excellent profit margins that could be made exporting surveillance technology to the PRC. On the way out, one of my hosts asked me my impression. I responded that while ostensibly the business arrangements this man was pushing were legal, they shouldn't be. I noted that those Chinese companies would likely wind up on the Department of Commerce's Entity List sooner or later, and deservedly so.

I also added that given the nature of the government of China, what this man was doing for a profit was the very definition of evil.

For many of us, there is a category we might call "money we don't want to earn" - for example, by selling drugs, financing child labor or other human-rights abuses, horrific violations of the natural environment, or committing acts of treason, for starters. Across the investing world, the idea that "capital F" Finance ought to be more responsible for the outcomes generated by its allocations of capital is, today, not unpopular.

Among a certain set, however, it is their bread and butter.

One of the most important ways we can disengage with China is by restricting the avenues through which money in the free world finds itself funding the activities of the Chinese state.


Paying for Abuse

Given the unfortunate fact that national security laws in China now make all private companies in that country de facto arms of the state, we can begin with the idea that any business done with a Chinese entity technically works to fund those activities. The old and tired-sounding "Always buy American" (or Australian, or German, or Japanese, etc.) should be be swapped for a different approach: Aspire to never buy Chinese.

While it may be difficult to shift a number of products out of our international supply chains quickly, there remains no good excuse for knowingly continuing to buy products from a country whose profit margin pays for evil. Whether it's the PRC's increasing horrendous human-rights abuses, its surveillance / police state, massive military buildups including in the field of nuclear weapons, or the stated and regularly exercised intention of spreading all of these systems across the world to share with the rest of us, we don't need to pay for it.

The tax revenues alone that are generated for the Chinese Communist Party's uses punch a hole in the ethical case for buying Chinese-made products. A strong argument can be made that economic consequences in response to the behavior of the Chinese government would also, in the long term, be better for the people of China.

So, what do we do instead? While it often feels as if everything is made in China these days, it isn't. We can reward friends and allies around the world and offer mutual support among like-minded regions by substituting many Chinese goods for those made elsewhere. This is one circumstance in which grassroots efforts can go far, but only if they are applied to the companies whose systems rely on Chinese exports.

As of 2019, the top export categories from China to the rest of the world were:

  1. Broadcasting equipment (8.08%)

  2. Computers (5.48%)

  3. Integrated circuits (4.18%)

  4. Office machine parts (3.21%)

  5. Telephones (2.13%)

  6. Semiconductors (1.35%)

  7. Electrical transformers (1.2%)

  8. Insulated wire (0.94%)

  9. Electric heaters (0.86%)

  10. Other electrical machinery (0.8%)

Together, these categories represent nearly 30% of $2.57 trillion in Chinese exports in 2019. Interestingly enough, most also pose national security risks if supplied by an untrustworthy party. (We'll cover more of this later in this series.) Many of them are products that are imported for B2B uses, while the remainder are for basic consumer uses.

In fact, many of the top export categories fall into electronics and computing, industrial machinery, telecommunications, and consumer electronic products. That is less of a heavy lift than it may sound. After all, not a single one of these isn't already made outside of China. Thirty years ago, very few of them were made in China. If you throw in those next 30 or 40 categories of exports, you get closer to 50% of total exports from the PRC.

Where do they go? The PRC's top trading partners are:

  1. United States (16.7%)

  2. Japan (5.9%)

  3. South Korea (4.19%)

  4. Germany (3.77%)

  5. Vietnam (3.54%)

  6. India (2.82%)

  7. Netherlands (2.52%)

  8. United Kingdom (2.47%)

  9. Mexico (2.43%)

  10. Taiwan (2.13%)

Just 10 nations buy over 46% of China's exports - again, that's somewhere in the neighborhood of $1.2 trillion in trade each year that goes into the coffers of companies controlled by the PRC. Between human-rights abuses, theft of intellectual property (IP), national security issues (hello, telephones, computers, integrated circuits, semiconductors, and electrical transformers), and unfair trade practices, there are overlapping and legitimate reasons to stop much of this trade. Instead, it would be feasible to institute international systems whereby the 10 nations listed above source those products from elsewhere, including from one another.

Such a plan may seem ambitious, but it is fundamentally necessary to avoid funding the efforts of a government already waging hybrid warfare against much of the world.

Thanks to China's new national security laws, every dollar spent on goods from the PRC technically flows to an organization that does the bidding of the Chinese government. The international community cannot go on ignoring that fact.


Financing the System

Basic trade in goods isn't the only area in which money flows to the PRC from countries with standards of behavior. According to the Chinese government itself, foreign direct investment reached new highs in 2021, at over $170 billion. While those numbers regularly involve a large amount of inter-China trade (Hong Kong, Macau, and the mainland running a circular system), it also involves some of the biggest names in international banking.

In 2019, JPMorgan agreed to pay $414 million for a 10% stake in China Merchants Bank (CMB). The PRC government does not allow banks the size of CMB to operate without state supervision and Chinese Communist Party observers on staff. It is also true, however, that the bank is controlled by the government via an obscured string of companies. China State-Owned Assets Supervision & Administration Commission (SASAC) is a group that operates directly at the behest of the State Council. SASAC owns 39.8% of CMB. Hexie Health Insurance, which owns another 6-odd percent, is owned in turn by Fujia Group (51%) and Nanjing Yangzi State-owned Investment Group (25%), both state enterprises that took on state-owned Anbang Insurance Group's shares after a 2019 sale. Dajia Life Insurance, with 4.93%, is another state-owned entity designed to restructure Anbang's assets, while China Securities Finance Corp. is also state-owned.

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Source: MarketScreener

Shortly after JPMorgan made its move to pump some money into Chinese government banking, Goldman Sachs received permission to buy out its joint-venture partner. This sounds good on paper, as the Chinese government rarely lets foreign firms own their own operations in China (again, breaking international trade law and WTO standards). But as Fortune noted at the time:

Some U.S. lawmakers have questioned the push by big banks into China, which is counting on investments to help transform its export-led economy. Beijing has also been cracking down on broad swathes of its private sector, roiling markets and prompting prominent investors such as George Soros to warn against investing in China.

For Goldman, the story goes way back. The first US bank to establish a joint venture in China - in the early '90s - the bank only won the honor of taking full ownership after 30 years of kissing the feet of CCP leaders in a desperate attempt to get access to the Chinese market. Hank Paulson, pictured below laughing giddily with then-Vice Premier Wang Qishan (who so directly told foreign investors the promise of the Chinese market was too tempting to address IP theft and unfair trade concerns), was the head of US Treasury at the time of this photo. Just before that, he was chair and CEO of Goldman Sachs.

Hank Paulson, left, former Goldman chief and ex-US Treasury secretary, meets Wang Qishan, then vice-premier of China, in Beijing in 2008

Image Courtesy Financial Times Minoru Iwasaki-Pool/Getty Images

Now Hank Paulson runs the Paulson Institute, which seeks to promote collaboration between the nations with the help of Tsinghua University and the Center for China & Globalization, a United Front Work Department organization that the CCP uses to compromise corruptible foreigners as part of one the most massive and successful efforts in its broad-spectrum espionage apparatus.

We will revisit this problem in the section dedicated entirely to United Front activities later in this series.

For now, it is sufficient to know just a few of Goldman's activities in the PRC. According to the firm's own website

Fifteen mainland Chinese companies had been privatized in the first half of 1997, raising some US$2.51 billion, but China Telecom dwarfed them all. At US$4.04 billion (US$6.32 billion in 2019 dollars), it was the largest Asian IPO ever outside of Japan and the first time a major Chinese state-owned enterprise partially listed its shares on the New York Stock Exchange. Considering the timing - just after the Asian Financial Crisis erupted - the success of this landmark offering is even more remarkable.

Along with Beijing-based China International Capital Corporation (CICC), Goldman Sachs served as advisor, joint global coordinator and joint lead manager on the IPO. China Telecom had only recently come into existence, born of the combination of the assets of two southern-China-based telecoms that had been selected by Goldman Sachs and CICC in consultation with the Chinese government, whose Ministry of Posts and Telecommunications controlled the new firm. It was incorporated just seven weeks before the IPO.

Of course, while Goldman labels "the success of this landmark offering ... remarkable," it was, in fact, in the end, more remarkable for its failure. After realizing the degree to which Chinese state-owned telecommunications companies presented a threat to national security, the NYSE was forced to delist the companies in 2021, including China Telecom.

The company's machinations on market access and power-broker status have throughout the years served to increasingly frustrate the US government, most recently prompting national security adviser Jake Sullivan to note at a White House briefing in February 2021:

Our priority is not to get access for Goldman Sachs in China; our priority is to make sure that we are dealing with China's trade abuses that are harming American jobs and American workers in the United States.

As one of the US finance sector's best-connected darlings on the American government side, Goldman also provides financing to Chinese government entities.

According to the Washington Post:

U.S. investors hold about $1.1 trillion in stocks and about $100 billion in bonds issued by Chinese entities, about five times what is captured in official U.S. statistics, according to a report by Rhodium Group and the National Committee on U.S.-China Relations.

By the end of 2020, Goldman had extended $17.5 billion in financing to Chinese companies and government agencies, almost twice the figure from two years earlier, according to its securities filings.

And the list goes on and on. Morgan Stanley manages a China Equity Fund that, among other things, pours money into China Merchants Bank. Interestingly, other large holdings include WuXi Biologics Cayman Inc., recently added to the Department of Commerce's Unverified List, and Tencent, which helps censor Chinese netizens for the PRC government through its WeChat platform and whose CEO, Pony Ma, stated that the company knows its place and won't neglect or shy away from its duties of serving the country.

In fact, it is likely impossible to find any large Western financial institution that does not at this point have a significant investment in something government-owned or government-controlled in China. Financiers stand to make the most money by pleasing the Chinese government, which is why they are so regularly targeted for influence and espionage work.

The question isn't whether they can currently attempt to legally do business with the Chinese government, despite becoming compromised in the process in myriad ways. The question is, Why would the free world let them?

Any moneyed individuals making large investments in companies, efforts, and/or individuals that support an adversarial foreign government and its military / intelligence apparatus to boot will become a national security vulnerability by their very nature.

Roman banks didn't finance the Visigoths, and Anglo-Saxons weren't offering loans to the Vikings to build more ships for their raiding parties. The Western world doesn't need to finance the banks and companies that work so hard with the PRC government to destroy our companies, shred international human-rights standards, and target foreign countries for debt-trap diplomacy.

In fact, since we're dealing with entities controlled by a government that for two years has consistently lied about the severity and nature of the novel coronavirus outbreak, helping to greatly exacerbate the severity of a pandemic and resulting economic crisis that has done trillions of dollars in damage, $0 in investment seems the appropriate amount.


Disengaging Dollars

For decades, the dynamic has remained the same. Consumers in the United States and allied and friendly nations regularly pour money into China via the purchase of products that are illegally dumped, stolen, built with slave labor, or all of the above. Those dollars go to companies that the Chinese government controls and retains the right to use for espionage purposes. Our international finance system works hard to pour billions (trillions, over years) into those same entities and into the coffers of the Chinese government.

Meanwhile, the era of Xi Jinping's concentration of power has heralded a new aggression by which the PRC government seeks to indebt and control poorer nations, grow its military, threaten countless other countries that refuse to do its bidding, and act in bad faith on a number of fronts.

The following actions will help to address these goals:

  1. For the United States, rejoin the TPP agreement, followed by executing the already planned pursuit inside that organization of the restriction of imports from China of any goods that benefit from stolen IP and unfair trade practice.

  2. Pass international laws restricting investment in PRC industries known to benefit from slave or child labor (including those individuals being shopped out from the concentration camps in Xinjiang to factories in China's heartland).

  3. Pass laws restricting sales of components and electronics that threaten the national security of importing nations. This will likely need to take place on a nation-by-nation basis but could be supported by mutual agreements in international forums.

  4. Pass laws removing existing Chinese government-owned and government-controlled entities from US stock exchanges and prevent future listings of the same types of entities.

  5. Expand the Department of Commerce's Entity List to include companies known to be developing technology that could, under Chinese national security law, be used for espionage against, surveillance on, or data mining of, US citizens.

  6. Create an international security standards body with the goal of achieving Item #5 among nations across the world to protect their own citizenry in the same manner.

  7. Pass new laws that ban outright the investment of US capital in Chinese government-owned entities.

  8. Extend Item #7 standards to the same or similar bodies as that described in Item #6.

Enough is enough. We may not be able to change the CCP's bad behavior in one stroke, but we are not obligated to pay for it.


Your comments are always welcome.


Evan Anderson



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