With Chinese acquisitions hike, US tightens scrutiny on overseas investments

Illuminated commercial buildings are seen from the observation deck of the Oriental Pearl Tower at night in the Lujiazui Financial District in Shanghai, China, on Friday, Oct. 13, 2017. Photographer: Qilai Shen/Bloomberg via Getty Images

Lawmakers in Washington, spurred by Chinese acquisitions of American firms, are moving to broaden the government’s authority to scrutinize overseas investment in the U.S. with bi-partisan legislation set to be proposed in the coming days, according to people familiar with the matter.

The bill would expand the power of a national security panel to review investments by foreigners to include joint ventures and minority stakes in companies, according to documents detailing the legislation obtained by Bloomberg.

Lawmakers say the current framework for reviews conducted by the Committee on Foreign Investment in the U.S., or CFIUS, misses deals that pose national security risks because the panel focuses primarily on full acquisitions of American companies even though foreigners conduct a range of deal types in the U.S.

“Many Chinese investments are coordinated state-driven efforts to target critical American infrastructure and disrupt our defense supply-chain requirements,” said Republican Congressman Robert Pittenger of North Carolina, one of the sponsors of the legislation. “Our bi-partisan bill strengthens and modernizes CFIUS to give the government the necessary tools to better track and evaluate Chinese investments.”

The Defense Department has raised concerns about Chinese investors financing American start-ups that are developing leading-edge technology in sectors with military applications like artificial intelligence, augmented reality and robotics. Those types of investments generally avoid CFIUS scrutiny because they’re not full acquisitions.

Fallen Apart

The proposal follows a drumbeat of concerns from lawmakers about recent Chinese deals in U.S. technology, agriculture and financial services. Chinese acquisitions and minority investments in the U.S. peaked in 2016 at $45.9 billion, up from $17.7 billion in 2015, according to Bloomberg data. Chinese deals in 2017 so far are behind 2016’s pace at $23.6 billion.

Several Chinese deals have fallen apart this year after encountering objections from CFIUS, an interagency panel that reviews foreign acquisitions of U.S. companies for national security risks. The panel is led by the Treasury Department and includes officials from the Defense, State and Justice departments among others.

While CFIUS can impose changes to deals, only the president can block them. In September, President Donald Trump blocked the sale of chip-maker Lattice Semiconductor Corp. to a Chinese-funded investment firm. In stopping the deal, the U.S. in part cited the Chinese government’s role in supporting the acquisition.

Yet lawmakers remain worried that deals that pose a risk to U.S. security aren’t getting a proper vetting and that China deserves special scrutiny. Several acquisitions by Chinese buyers are in the pipeline awaiting approval.

In a speech earlier this year at the Council on Foreign Relations, Senator John Cornyn of Texas, who is sponsoring the bill in the Senate, argued for reforming CFIUS reviews to deal with China’s investments in American technology, which he called a threat to U.S. military superiority and the defense industry.

“CFIUS has simply fallen out of date and needs to be modernized,” he said. “It wasn’t designed to handle the investment-driven transfer of leading-edge technology that China is vigorously pursuing today.”

Expanded Jurisdiction

In addition to expanding CFIUS jurisdiction to include joint ventures and minority-position investments, the legislation would update the definition of “critical technologies” to include emerging innovations important to U.S. technological advantage, according to a fact sheet of the bill.

The Treasury Department and Justice Department have been closely involved in drafting the bill, with Cornyn and Pittenger striving to achieve the administration’s full support before proposing the legislation, according to one of the people.

“We are close,” Republican Congressman Devin Nunes of California said about the legislation’s progress. Nunes is chairman of the House Intelligence Committee and is one of the sponsors.

A report this year by a Defense Department unit called the Defense Innovation Unit Experimental estimated that the Chinese share of venture financing is about 2 percent to 3 percent of the $137 billion U.S. venture-capital investment market. The report recommends expanding CFIUS’s jurisdiction to include venture investing, reducing the use of mitigation agreements that allow deals to proceed, and permitting the Defense, Justice and Homeland Security departments to jointly block transactions without going to the president.

The calls for revamping CFIUS have spurred others to caution against undermining the U.S.’s openness to foreign investment.

Matthew Goodman, a senior adviser at the Center for Strategic and International Studies in Washington who previously worked for the National Security Council, said the U.S. has to strike a balance between protecting national security and maintaining the open investment environment that he said is critical for the country’s economic success.

“I do think we have to be careful not to get caught up in rhetoric and not create a self- fulling prophecy by scaring off the Chinese,” Goodman said. “There is already a view in China that we’re hostile and trying to block them. The evidence doesn’t support that, but that’s what they think.”

Also read:

Lawmakers ask U.S. to block Chinese takeover of Lattice Semiconductor

U.S. firm calls off $416m pact with China’s HNA in absence of regulatory nod

Bloomberg

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.