China’s money: Too dangerous for business, too tempting for government

Neil Patel Co-Founder and Publisher, The Daily Caller
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The U.S. government is so concerned about China’s military and intelligence goals that it monitors and at times restricts Chinese investments in the U.S. down to even very small transactions. Yet nobody in Washington seems to be asking if selling our debt to China in amounts totaling hundreds of billions or even trillions of dollars poses any long-term risk to the United States.

The U.S. government’s Committee on Foreign Investment in the United States (CFIUS) just decided that it was too dangerous for a Chinese business to spend a couple million dollars to purchase part of a U.S.-based communications firm. As a result, on February 21, 2011, China’s Huawei Technologies gave up on its effort to buy a $2 million share of Santa Clara, California-based 3Leaf Systems.

CFIUS was created to protect the U.S. from investment by foreign firms that could jeopardize U.S. national and economic security. The committee is part of the administration and advises the president on whether to accept or reject foreign investment in U.S. companies. The committee is chaired by Treasury and includes agencies such as the Departments of Commerce, Justice and Homeland Security.

To CFIUS, the size of a transaction is secondary. The committee is concerned about influence, or what it calls “control.” Is Huawei’s investment sufficient to influence how 3Leaf operates and could those operations potentially harm U.S. national security? If the answer is yes, then CFIUS must step in to prevent or restructure the transaction.

Whether the committee is being too strict in applying its test to Huawei’s $2 million purchase is hard to tell. To protect corporate confidences, CFIUS is very judicious in its release of information. The deal, however, raised enough unease on Capitol Hill that a bipartisan group of senators and congressmen wrote to the Treasury secretary expressing their concerns about the transaction. Press reports include speculation that Huawei’s possible connection to the Chinese military is the likely culprit, a connection Huawei denies.

What is striking about the Huawei-3Leaf deal is that it is occurring at a time when China is lending the U.S. government hundreds of billions of dollars. Nearly one in every two dollars the U.S. government spends is now borrowed. China is our number one foreign lender. Currently the U.S. owes China nearly $900 billion. If a Chinese company’s investment of $2 million in a private U.S. business could harm our national interests, what impact does almost $1 trillion in Chinese government investment have?

The administration’s likely retort to such a question would be to deny that purchasing U.S. Treasuries gives the Chinese government any influence or control over U.S. government actions. The Chinese government is not buying sensitive technologies from the U.S. government, it is buying IOUs. WikiLeaks has exposed such a defense. According to Reuters and other news outlets, recently leaked U.S. cables show that China has used the U.S.’s huge debt burden, along with America’s continuing need to borrow more money, to pressure the U.S. government into cutting off sales of arms to Taiwan. Other cables point to Chinese pressure to rein in the U.S. Federal Reserve’s easy-money policy.

The contrast is stark. On one hand, a business with potential past ties to the Chinese military is forbidden from investing $2 million in a U.S. company for fear that it will damage America’s national interests. On the other hand, the Chinese government, which includes the Chinese military, is allowed to invest almost $1 trillion in the U.S. government. Further, the Chinese government has demonstrated its willingness to use its investment to influence U.S. government actions including actions directly related to our national and economic security.

It is an uncomfortable fact that the U.S. cannot borrow the trillions of dollars of new debt the administration wants to spend without Chinese investment. The administration needs to keep borrowing from China in order to put off making the difficult decisions necessary to balance our nation’s books.

The question is, if the administration is concerned about Chinese businesses with a connection to the Chinese government owning a controlling share of U.S. companies, why isn’t the president concerned about the Chinese government owning a controlling share of the U.S. debt?

The current U.S. national debt does not only burden our children; it limits America’s international influence and makes the U.S. dependent on nations that may not share our vision of the future. Unfortunately, under the president’s proposed budget, the situation gets much worse. This national security aspect of our massive and growing debt has to date not been a major part of the budget debate, but it should be. Based on CFIUS’s actions to date, it seems likely that if our government were a business, CFIUS would advise the president not to let the U.S. borrow any more money from China.

Neil Patel is co-founder and Publisher of The Daily Caller and previously served as Chief Economic and Domestic Policy Advisor to Vice President Dick Cheney. Richard Russell is CEO of VIAforward, a technology-based consulting firm. Richard served on CFIUS during the George W. Bush Administration. He also has served as a U.S. Ambassador and as a policy advisor in the U.S. House, Senate and White House.