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U.S. panel urges wariness as Chinese investment grows

WASHINGTON (Reuters) - China's fast-growing direct investment in the United States has created jobs and helped some firms and localities, but the security and economic risks posed by the large Chinese state role made such investment a "potential Trojan horse," a congressional advisory panel said in a study on Wednesday.

The study, commissioned by U.S.-China Economic and Security Review Commission, found that Chinese-owned firms in the United States added between 10,000 and 20,000 workers in the past five years and helped shore up financially troubled U.S. firms.

At the same time, China's foreign direct investment (FDI) is spearheaded by state-owned enterprises that enjoy government subsidies and other market-distorting policies that support industrial policy and non-market goals of the Chinese government, it said.

"Based on this juxtaposition, some will conclude that Chinese FDI in the United States is a potential Trojan horse," the report concluded.

Estimates by private economists put Chinese direct investment in the United States at $30 billion through the end of 2011, while official estimates count $5.8 billion through 2010. The number is expected to increase rapidly, said the study.

"These entities are potentially disruptive because they frequently respond to policies of the Chinese government, which is the ultimate beneficial owner of U.S. affiliates of China's SOE (state-owned enterprises)," the report warned.

The ample flow of subsidies to state-owned enterprises from the national and local governments and state-owned financial institutions "raises the possibility that Chinese largesse could determine market outcomes for purchases of U.S. businesses," it said.

The study - conducted for the commission by consultants Capital Trade Inc. in Washington - also pointed to economic security and national security risks that have colored U.S. debate on Chinese investment and caused lawmakers and officials to question if not reject several recent high-profile deals.

Chinese telecoms firm Huawei Technologies, the world's second-biggest telecoms equipment maker - and a smaller firm called ZTE - spent much of this year under siege by U.S. lawmakers who suspect Huawei has close ties to Beijing and that its equipment could be used for espionage.

"China's current policy guidance directs firms to obtain leapfrog technologies to create national champions in key emerging industries, while investment guidance encourages technology acquisition, energy security, and export facilitation," said the 145-page report.

In October, President Barack Obama cited security concerns in blocking a bid by Ralls Corp, which is owned by two Chinese nationals, to build wind farms close to a naval training site in Oregon used to test unmanned drones.

The U.S.-China Economic and Security Review Commission is a panel set up in 2000 to monitor the national security implications of the trade and economic relationship between the two countries.

(Reporting By Paul Eckert; editing by Christopher Wilson)

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