This Wednesday at the White House, Chinese and US officials will sign a hard-fought trade deal that pledges to increase Chinese purchases of American goods and legal protections of US intellectual property in exchange for lowered tariffs on Chinese goods coming into the country.

With Phase 2 talks about to begin, Hudson experts are looking ahead to the issues that will dominate the future of the US-China financial relationship. In his latest report, Hudson Research Fellow Nate Sibley examines how the Chinese Communist Party has exploited the US financial system through shell companies, while Senior Fellow John Lee reviews how China’s financial diplomacy is executed for political gain in Europe and the Indo-Pacific.

See below for this week's required reading.

China's Shell Game in the US

China's broad use of shell companies within the US exposes a major weakness of the US financial system. Drawn from Nate Sibley's new report, Countering Chinese Communist Party Threats with Corporate Transparency, here's a look at how shell companies are used in the US for a range of illicit purposes.

Fueling the Opioid Crisis: Chinese fentanyl producers use US shell companies to launder drug profits, conceal connections with Mexican drug cartels and hide ownership of the freight companies that ship fentanyl directly to Americans. These anonymous shell companies play a critical role in both the Chinese production and US distribution of opioids that kill more than 47,000 Americans annually.

Trafficking Sex Slaves: A report on 9,000 illicit massage businesses across the United States found that the majority of victims were women from China and South Korea. While 3,000 of these businesses had no corporate records at all, over 70 percent of the remaining 6,000 businesses listed untraceable shell companies as the owner.

Supporting Forced Uyghur Labor: Within China, Uyghurs detained in Xinjiang Province are routinely forced to produce textiles and other goods. Shell companies in Chinese supply chains make the origins of such products untraceable for US importers.

Stealing IP: Chinese entities acquire valuable American IP and technology in US bankruptcy proceedings while using shell companies to conceal their participation. As the China Economic and Security Review Commission has warned, even a strengthened Committee on Foreign Investment in the United States will be unable to detect and properly scrutinize Chinese investments in US technology firms if their ownership is masked by shell companies.

Housing our Government: A Government Accountability Office (GAO) study of 1,406 high-security US federal leases could not identify the owners in about one-third of cases because many of them were shell companies. In cases where the GAO did identify the owners, nine out of fourteen government agencies working on sensitive national security issues were unaware that the buildings in which they were housed were ultimately owned by companies in China and elsewhere.

Circumventing Immigration Law: Thousands of Chinese nationals use US-registered shell companies as phony employers to remain in the US illegally after their student visas expire, an NBC investigation found. Many go on to work for US firms dealing with sensitive information, and at least one is now being prosecuted for espionage.

Quotes have been edited for length and clarity

A New Approach to Investment

Hudson Senior Fellow John Lee provides a case study in how Beijing aptly links economic investment to political influence in his recent report, China’s Economic Slowdown: Root Causes, Beijing's Response and Strategic Implications for the US and Allies.

Hungary: Since receiving Chinese Belt and Road Initiative-linked investments, including for the $3 billion Hungary-Serbia railway project, Hungary has emerged as China’s most enthusiastic spokesperson in Eastern Europe. Budapest has strongly argued that the EU should grant China’s economy “market status.” In 2017, Hungary derailed an EU consensus when it refused to sign a joint letter denouncing China’s torture of detained lawyers. Both Hungary and Greece remain unwilling to criticize Chinese actions in the South China Sea, thereby preventing the EU from presenting a unified voice on this issue.

Greece: Unlike other Western European countries, Greece has openly welcomed Chinese investment. In 2017, then prime minister Alexis Tsipras boasted of China’s investment in the port of Piraeus as the opening for “China’s gateway into Europe.” That same year, Greece blocked an EU statement to the UN Human Rights Council on Chinese human rights violations, which a Greek official called “unconstructive criticism of China.” This marked the first time the EU has failed to make a statement to the UN Human Rights Council.

Pakistan: Enormous Chinese investments, like those in the Port of Gwandar, have given the economy an instant sugar hit but have burdened the country with debt that it cannot repay and turned it into a long-term Chinese client state.

Sri Lanka: Unprofitable and debt-heavy projects such as the Hambantota Port have forced the country into a $1.1 billion debt-for-equity swap with China, giving Beijing long-term control of a military-capable port and considerable leverage over Colombo’s foreign policy.

Cambodia: Over the past five years, China has invested over $5 billion in Cambodia, a sum equivalent to about one-quarter of the country’s GDP, in return for Phnom Penh’s pushing Chinese interests in organizations such as the Association of Southeast Asian Nations.

Quotes have been edited for length and clarity

Go Deeper: Hudson on the Region

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