U.S. Investors Find Favor in Chinese Security

Chinese security and surveillance firms incorporating in U.S. to attract American capitalists


Because the company is already traded on an American stock exchange and is not selling any additional shares, Securities and Exchange Commission regulations say approval is automatic once the company fills out a notification form and the New York Stock Exchange confirms that it has approved the listing.

Hedge funds and investment banks with ties to Chinese surveillance companies declined to comment.

Over the past year, American hedge funds have pumped more than $150 million into Chinese surveillance companies.

The Chinese government trade association for surveillance companies, which also regulates the industry, predicts that the surveillance market here will expand to more than $43.1 billion by 2010, compared to less than $500 million in 2003. Under the ''Safe Cities'' program adopted by the Chinese government last winter, 660 cities are starting work on high-tech surveillance systems.

Many Western experts, skeptical that China faces a terrorism threat, have suggested that the government may be using it as an excuse for tougher policies toward ethnic minorities in western China, notably the autonomous region of Xinjiang, and toward Tibet.

Terence Yap, the vice chairman and chief financial officer of China Security & Surveillance Technology, said his company's software made it possible for security cameras to count the number of people in crosswalks and sound an alarm to the police if a flood of people appeared at an unusual hour, a possible sign of an unsanctioned protest.

Yap said that terrorism concerns do exist and that his company had outfitted railroad stations and government buildings in Tibet with surveillance systems.

Yap and Lin Jiang Huai, the chairman and chief executive of China Public Security, said their companies did not do business with the Chinese military and should not raise concerns in the United States. They also said their businesses use technology developed in China and therefore not subject to U.S. export controls.

China Security & Surveillance has been aggressively raising money in the United States, including $110 million in convertible loans so far this year from the Citadel Group, a hedge fund in Chicago. The company has used the money in deals to buy 10 of the 50 largest surveillance companies in China, including three deals in July alone.

James Mulvenon, the director of the Center for Intelligence Research and Analysis, which does classified analyses of foreign military and intelligence programs for the Pentagon and other U.S. government agencies, said that Beijing clearly wants the company to consolidate the industry.

''They're really sort of the Ministry of Public Security's national champion,'' Mulvenon said of China Security & Surveillance. ''In terms of the gear and building the surveillance society, they are the ones.''

After the company announced sharply higher sales and profits on Aug. 13, a succession of American hedge fund managers and investment bank analysts took turns during a conference call in questioning and congratulating Yap.

Traded on the over-the-counter bulletin board market while waiting for the beginning of trading on the New York Stock Exchange, the company has raised almost all of its money through the Citadel loans and private placements of stock with 17 institutional investors in the United States, including Pinnacle Fund and Pinnacle China Fund in Plano, Texas, and JLF, a hedge fund based in Del Mar, California.

Pinnacle Funds' investments have risen sixfold in 17 months. The funds, which raise all their money in the United States, are also the main investors in China Public Security Technology, with a stake that has tripled in value since February.

Barry Kitt, the founder and general partner of the Pinnacle funds, declined to comment. Citadel, JLF and Lehman Brothers officials also declined to comment.

Each time China Security & Surveillance makes an acquisition, it holds an elaborate banquet, with dancers. It calls the events press conferences, but the majority of the 500 or more invitees are municipal and provincial security officials, as well as executives of rival companies that may become acquisition targets.

''When they come, they hear central government officials endorsing us, they hear bankers endorsing us or supporting us, it gives us credibility,'' Yap said. ''It's a lot of drinking, it's like a wedding banquet.''