Rhetoric vs Reality: PPP Loans went to China Owned Companies

By the Curmudgeon

Introduction:

In this article, we connect the dots between our previous post on the undisclosed PPP loan recipients and several articles about China (fiendbear.com and scroll down to Current Links of Interest).

Recall that U.S. Treasury Secretary Mnuchin told a Senate committee hearing on June 10^th: “The Trump administration believes names of borrowers from the Paycheck Protection Program (PPP) along with the amounts they received are proprietary and confidential.” As we reported in the above referenced (hyperlink) article, that statement was later reversed and many of the names of the companies receiving PPP loans were released.

The data released by the U.S. Treasury Department revealed loan amounts in ranges only for businesses that borrowed more than $150,000, and information for private firms that took smaller loans was released only in aggregate.

It is crucial to remember that the $660 billion Paycheck Protection Program was created in March to be a lifeline for struggling small businesses (with fewer than 500 employees) in the U.S. It was never intended for foreign companies, yet many received PPP loans.

Now, a new study reveals that more than 125 Chinese companies received millions of dollars of taxpayer funded PPP loans. Is that consistent with the U.S.-China cold war which we anaylzed here?

Discussion:

The NY Times reports that a review of publicly available loan data by the strategy consulting firm Horizon Advisory found that $192 million to $419 million has gone to more than 125 companies that China (PRC) entities own or invest in. Many of the loans were quite sizable. At least 32 Chinese companies received loans worth more than $1 million, with those totaling as much as $180 million. The companies are named and described in the above referenced report which does not claim to be an exhaustive account of the more than five million loans that were initiated through the program.

Among the companies highlighted in the report were Continental Aerospace Technologies, which received a loan of up to $10 million, and Aviage Systems, which received a loan of up to $350,000. The companies are owned by Aviation Industry Corporation of China, a state-owned conglomerate that the Department of Defense classified this year as a Chinese military company.

HNA Group North America LLC and HNA Training Center NY, subsidiaries of China’s HNA Group, both received loans of up to $1 million. HNA Group specializes in real estate, aviation and financial services transactions and is part of the Fortune Global 500.

“The extent and nature of P.R.C.-owned, -invested and -connected entities among the P.P.P. loan recipients indicate that without appropriate policy guardrails, U.S. tax dollars intended for relief, recovery and growth of the U.S. economy — and small businesses in particular — risk supporting foreign competitors, namely China,” wrote Emily de La Bruyère and Nathan Picarsic, the co-founders of Horizon Advisory.

Large PPP loans went to Chinese businesses that spanned critical sectors such as pharmaceuticals, defense, advanced manufacturing, electric cars and information technology. For example, Dendreon Pharmaceuticals, a California-based biotech company, received a loan worth $5 million to $10 million. It is owned by Nanjing Xinbai, a Chinese state-invested company whose controlling shareholder has close ties to China’s Communist Party.

In each case, the United States was indirectly funding the kinds of corporations whose PRC owners the Trump administration regularly accuses of intellectual property theft. Is that not a huge contradiction?

Senate Republicans are currently trying to ensure that federal loans are not awarded to companies with links to the Communist Party of China. One provision would ban China-backed companies from eligibility for federal loans. But what about the PPP loans already awarded to such companies?

Analysis:

The cold reality is that PRC backed company loans, funded by U.S. tax dollars, shows the deep ties that remain between American and Chinese businesses even as relations between the countries have sharply deteriorated in recent months.

Chinese investment in the U.S. economy has reached more than $145 billion, according to data collected by Public Citizen. Since 2002, more than $120 billion in U.S. assets have been acquired by Chinese-backed financial interests — especially in real estate and construction, technology, and energy.

President Trump has regularly vented his anger at China and accused it of spreading the coronavirus that has put the U.S. economy in a severe recession. Secretary of State Mike Pompeo was extremely tough on China in his speech last week. The Trump administration has done everything possible to severely cripple China telecom giant Huawei and has just threatened to ban the China-owned video app TikTok, which has become widely popular among American teenagers.

Was all that talk just rhetoric? If not, where’s the bite?

The U.S. government seems to be looking the other way and has not yet commented on Chinese owned companies getting these multi-million dollar PPP loans. A Treasury spokeswoman noted that the Small Business Administration (SBA) might review any of the loans administered through the program and deny forgiveness if it turned out that the borrower was not eligible or misrepresented their business in the loan application. Yet the White House had no comment on the loans when asked by the NY Times.

Closing Quote:

Democratic National Committee (DNC) senior spokesperson and advisor Lily Adams released the following statement:

“Instead of holding China accountable, Trump allowed Chinese corporations and their subsidiaries to receive millions of dollars of taxpayer money while thousands of U.S. small businesses still struggle and more than 100,000 have been forced to close for good. Trump has repeatedly left American small businesses high and dry, making this crisis far worse than it needed to be for small businesses and their workers.”

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Stay safe, maintain a positive attitude, and be healthy. Good luck and till next time……

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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