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Panel: Chinese U.S. investments need more oversight

WASHINGTON A congressional advisory panel on Wednesday urged tighter screening of investment by Chinese state-owned companies in the U.S., saying they present unfair competition to American firms.

That's the primary recommendation of an annual report by the U.S.-China Economic and Security Review Commission. The panel advises Congress on the national security implications of the relationship between the world's two biggest economies.

It is proposing that Congress broaden the mandate of a committee chaired by Treasury Secretary Timothy Geithner that screens foreign investment proposals.

China already accuses the U.S. of discriminating against its companies, although analysts say American firms face bigger obstructions investing in China. Chinese investment in the U.S. is still comparatively low but has risen sharply in recent years and is set to hit record levels in 2012.

"Growing Chinese investment may offer an important new source for U.S. job creation and economic growth, but it is too early to know whether the benefits will outweigh whatever longer-term economic costs Chinese state-owned and state-directed investments may bring," the commission says.

Its report says that despite three decades of economic reform in China, state-controlled enterprises still account for as much as half of the Chinese economy, and their role has been enhanced by a $585 billion government stimulus during the 2008 slowdown.

The enterprises benefit from preferential financing from China's state-dominated banks, cheap land, fuel and electricity, regulatory exemptions and tax preferences, the commission says.

The commission proposes Congress examine Chinese investment and assess whether to widen the mandate of the Committee on Foreign Investment in the United States so it would be required to screen transactions by Chinese state companies that give them a majority stake in American companies.

Currently the committee screens investment proposals only on national security grounds.

The commission also proposes prohibiting investment in a U.S. industry by a foreign company whose government prohibits foreign investment in that same industry. That's a response to what it describes as the exclusion of American firms from investing in sectors dominated by state-controlled firms in China, such as telecommunications services and oil and natural gas.

The wide-ranging report also assesses China's military and cyber capabilities.

It recommends Congress conduct an in-depth assessment into Chinese cyber espionage practices. It says state-sponsored actors continue to exploit U.S. government, military, industrial and nongovernmental computer systems and that "Chinese exploitation capabilities are improving significantly."

China is also advancing its military modernization efforts, with development of advanced fighter jets, and space and ballistic missile programs, the report says, a strategy it views as aimed at restricting the ability of U.S. forces to operate in the vicinity of China, particularly in the event of a conflict over the self-governing island of Taiwan.

The report also notes significant improvements in China's nuclear forces and says within two years it will perhaps have attained three ways of delivering such weapons -- by bombs, land-based missiles and submarine-launched ballistic missiles. It voices concerns over "occasional disconnects" between China's civil and military leadership, introducing uncertainty about China's command authority of its nuclear weapons.

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