Tag Archives: CFIUS

China And US Increase Financial Distancing

DECOUPLING THE ECONOMIES of China and the United States would be a Herculean task after three decades of globalisation. US Trade Representative Robert Lighthizer told a US Congressional Committee as much this week before he was tweeted down by his president, who said complete decoupling remains a policy option for his administration.

The president has taken policy measures aplenty to discourage Chinese trade and investment in the United States, with the intent particularly of keeping US technology out of Chinese hands. This is small-scale decoupling on the ground.

One example is the increased use of national-security reviews by the Committee on Foreign Investment in the United States, commonly known by its acronym CFIUS. It has had its mandate expanded and new scope to investigate property deals near critical infrastructure and military installations is also being added.

The committee’s latest report to Congress, from which the chart below is taken, makes clear both how much broader is the swathe of inbound foreign investments CFIUS is taking an interest in since President Donald Trump took office in 2017 and how increasingly effective a CFIUS investigation is in prompting would-be acquirers to back off.

Roughly one-quarter of CFIUS reviews involve Chinese acquirers, the largest share of any individual country.

Another is the administration’s threat to promote legislation that could force Chinese companies from US stock exchanges by requiring them to report to US accounting standards.

Bloomberg reported recently that 58.com, an online classifieds firm, was going to go private and thus delist its shares from a US exchange. That would make it the fourth US-listed Chinese company to do so this year, an aggregate removal of $8 billion in market capitalisation, the fastest pace of withdrawal since 2015.

Bloomberg reports a similar trend with initial public offerings, with global banks walking away from deals to list Chinese companies in the United States.

Nothing like full decoupling, to be sure, but a step in the direction of increased financial distancing.

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Nexen a world away from Unocal for CNOOC

CNOOC’s $18 billion bid for Canadian oil and gas producer Nexen is the third China-related deal in recent months to have cleared the Committee on Foreign Investment in the U.S. (CFIUS), the regulatory agency that reviews mergers and acquisitions that could have implications for U.S. national security. BGI-Shenzhen’s bid for Complete Genomics and Wanxiang Group’s for battery maker A123 Systems also got a green light from CFIUS.

Its approval to buy Nexen was the final regulatory hurdle CNOOC needed to clear to close what will be the largest Chinese foreign investment to date. It must seem a far cry from its 2005 effort to buy California’s Unocal. That deal, with fewer security implications for the U.S. than the Nexen deal (the Canadian company has oil rigs in the Gulf of Mexico near U.S. military installations), was shot down by fevered political opposition in Washington, stoked by rival bidder Chevron, without ever even getting as far as a CFIUS review. Lessons learned.

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Huawei Performs U-Turn On CFIUS Review

If Huawei Technologies’ decision to contest a U.S. national security review rejecting its acquisition of patents from 3Leaf Systems was perplexing, its U-turn to accept it is a surprise. The company says it has changed its mind because of the controversy around its earlier decision to throw itself on the mercy of an executive ruling by President Barack Obama after the Committee on Foreign Investment in the United State (CFIUS) had recommended the deal be unwound. We had thought that the company might have had some backing from Beijing for its extraordinary initial position, and earlier this week a commerce ministry spokesman called for Washington to make its national-security reviews more transparent. Maybe this was all just testing the waters of Sino-American relations and finding them a bit too choppy.

Update: A bit of backwash from state media, suggesting the U.S. has overreacted in this case.

Further update: Reports from London (here via the FT) say Huawei is offering to give London’s metro system a free mobile wireless system in time for the London Olympic Games in 2012, an ‘Olympic host to Olympic host’ gift that it is estimated would cost the company upwards of $80 million. The inevitable national security concerns about a Chinese company running such a network in London have already been raised, but we do wonder what might be said it they had proposed the gift for the Metro in Washington, D.C. instead.

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Huawei Technologies: Beijing Gets Its Reciprocity In First?

We have been wondering what to say about Huawei Technologies’ decision not to follow last week’s recommendation by the U.S. Committee on Foreign Investment (CFIUS) that it sell patents acquired as part of last year’s acquisition of 3Leaf Systems, a U.S. software company that lets many computers combine as more than the sum of their parts. But now we have a conspiracy theory.

Huawei has instead chosen to throw itself on the mercy of an executive decision by the U.S. president, Barack Obama. This struck us as a hiding to nothing. It is highly unusual for a U.S. president to overrule any CFIUS recommendation. In this particular case, where domestic political pressure brought about a retrospective CFIUS national security review of the deal and there is no apparent argument to be made that the committee made a glaring error, the political cost would be so great that it is hard to imagine any quid pro quo that would make Obama willing to devote even a scintilla of his political capital to pay it, even if that quid pro quo came from Beijing.

By taking the decision it has, Huawei keeps clean its argument that it is a civilian telecoms company and not a front for China’s military, the accusation made against in the U.S. and which it denies. Yet by not doing the expected thing — quietly walking away form the deal in the face of an adverse CFIUS finding —  it is setting itself up for a public rebuff from Obama, assuming that he rules as we believe he will. To paraphrase  Oscar Wilde’s Lady Bracknell, to lose one U.S. deal on national security grounds, as Huawei has already done in 2008, may be regarded as a misfortune. To lose both looks like carelessness.

Yet it is equally difficult to believe that Huawei would put itself through all that without at least the tacit support of Beijing — which will have to do a bit of diplomatic huffing and puffing in the event of the deal being unwound. Obama has only 15 days to decide so the decision is likely briefly to unsettle Sino-American relations so soon after President Hu Jintao’s state visit to Washington last month sought to smooth them. But equally, Beijing, ever one for reciprocity, may be quite happy to have a rejected Chinese takeover deal for an American company in its back pocket along with some ruffled national amour-propre now that it is setting up a committee of its own to review foreign acquisitions on national security grounds.

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China To Vet Foreign M&A On Broad National Security Grounds

China plans to vet proposed foreign takeovers of Chinese companies in the interests of national security. The State Council says it is establishing a ministerial level committee under the National Development and Reform Commission and the commerce ministry. It will start work next month and look at proposed foreign acquisitions in areas involving national defense, agriculture, energy, resources, infrastructure, transport, technology and equipment manufacturing. It will assess their impact on economic stability, social order and the country’s technology R&D efforts.

China is not the first country to set up such inter-agency scrutiny, though not many have given theirs such a broad remit. The U.S., for example, has its Committee on Foreign Investment in the United States (CFIUS). Its mandate is narrowly national security, though some conservatives want it broadened and the committee strengthened in response to China’s growing foreign direct investment.

China attracted $106 billion in foreign direct investment in 2010, up 17% on the previous (global financial crisis wracked) year. Foreign companies have not previously faced formal review of their proposed direct investments in China on national security grounds, although informal barriers have long existed and Beijing has always held an ultimate veto. In 2008 China introduced an anti-monopoly law (and promised the national security review mechanism that has now been announced). Coca-Cola’s $2.4 billion bid to take over Huiyuan Juice in 2009 was one that got stymied on competition grounds. Before that ArcelorMittal and Russia’s Evraz Group were rebuffed in attempts to buy into the steel industry.

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A Proposed U.S. Response To The Spreading World Of China’s FDI

Last month, The Heritage Foundation, a conservative American think-tank, published its annual map (above) of China’s direct foreign investment (FDI) by destination, covering investments of at least $100 million made in 2011. The data comes from its China Global Investment Tracker, which goes back five years.

The dominant aspect of Chinese investment in 2010 was a rush to South America, led by (but not limited to) Brazil. Other features include a jump in new, large construction contracts and fewer failed transactions. Chinese investment in the U.S. in 2010 was steady at a bit over $6 billion but far more diversified than in 2009.

No great surprises there, though the map does highlight the ubiquity of Chinese FDI last year.

In a new blog post, Derek Scissors, Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, lays out the Foundation’s policy prescriptions. These include clarifying which areas of America’s natural resources and manufacturing are open to Chinese FDI and “sharpening the mandate” of the Committee on Foreign Investment in the United States (Cfius), an inter-agency committee comprised of representatives of 16 U.S. government departments and agencies that reviews the national security implications of foreign investments in the U.S.

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