Forbes: As Chinese Investment in U.S. Increases, So Too Does Scrutiny

  November 2, 2016   News Stories

News story originally published at Forbes.com

By Ellen Sheng

Chinese acquisitions in the U.S. have reached record levels this year and, it seems, so too have the number of Chinese deals scrutinized or scuttled by the Committee on Foreign Investment in the United States.

A number of Chinese deals this year were thwarted by security concerns raised by CFIUS. Then last month the Government Accountability Office said it would examine whether CFIUS has enough authority to keep track of the increasing number of deals by Russian and Chinese buyers.

“Now is an opportune time for GAO to review what has worked well, and where CFIUS authorities may need to be expanded, especially given the rise in state-owned enterprises and state-controlled enterprises from China and Russia, among other designated countries,” the lawmakers said in their letter.

Some market watchers say that the increase in scrutiny is a natural result of the increasing number of deals by Chinese companies. Chinese investments in the U.S reached a record $18.4 billion in the first half of the year, according to Rhodium Group, more than triple the amount invested in the first half of 2015. In CFIUS’s latest annual report to Congress, which came out in February, the agency said deals by Chinese investors made up 68 out of a total of 358 deals examined by the agency, making it single largest group. Rhodium Group’s Thilo Hanemann says China’s rise in prominence in CFIUS reviews is simply a game of numbers.

Yet others note that CFIUS’s scrutiny of deals is indeed different than scrutiny of deals by ally countries and that GAO’s recent involvement is noteworthy.

The Chinese-U.S. relationship is different

“China has eclipsed the United Kingdom as the country with the most transactions under review by CFIUS. Chinese-led transactions are certainly going to be viewed differently. Unlike with Great Britain, the United States does not have full alignment with China on issues such as protection of intellectual property, data privacy, or military alliance. There’s no NATO with China,” said Scott Flicker, partner at Paul Hastings and chair of the firm’s Washington DC office.

“Chinese investors are going to receive scrutiny based on the nature of the relationship between the U.S. and China, particularly in industries that may raise national security concerns. Chinese are scrutinized differently because the Chinese-U.S. relationship is different,” Flicker explained.

The concerns being raised about Chinese economic ascendancy and investment in the U.S. are reminiscent of the concerns raised in the late 1980s and early 1990s about “Japan Inc.,” said Flicker. “This looks like that.”

The recent GAO request is something to watch because of the U.S.-China political climate, said Mario Mancuso, partner at Kirkland & Ellis in Washington DC and former U.S. Under Secretary of Commerce, Industry and Security.

The GAO gets lots of requests that don’t lead anywhere, but this one is noteworthy because “the political ballast in this country is seemingly moving in a different direction. Forty percent of the American public have identified concerns with free trade. There is a large portion of people on the Democratic and Republican side who are skeptical of open markets. That was not the case three or 10 years ago,” he explained.

“There is now an ascendant China and a barely-restrained Russia and, because of this Administration’s policy decisions, the U.S. is widely perceived to have lost interests in some parts of the world. Our security profile is fundamentally different today, so naturally the agency charged with reviewing transactions for national security interests is now doing so against a different backdrop,” he continued.

Scrutinized deals

While many Chinese deals are approved, others are scrutinized for reasons that are not always immediately clear to the buyer. In August, CFIUS approved a deal by China National Chemical Corp to takeover Syngenta, an agricultural giant supplying pesticides and seeds, for $43 billion after scuttling a number of smaller deals in the electronics sector.

Recently, Anbang Insurance Group’s acquisition of Hotel del Coronado, which is located near a U.S. naval base, fell through after U.S. national security officials opposed the deal. Anbang was able to complete the rest of the deal which included a portfolio of 15 hotels from Strategic Hotels & Resorts including San Francisco’s Westin St. Francis and Ritz-Carlton resorts in Half Moon Bay and Laguna Niguel in California.

In an unusual move, the CFIUS approached Chinese insurance giant Fosun International about a month after it closed on a deal to buy an 80% stake in property and casualty insurer Ironshore for $1.84 billion. The CFIUS officials had concerns about how Fosun would handle professional liability coverage to U.S. government employees, including the CIA.

In January, Philips said it had to terminate a $2.8 billion deal for China’s GO Scale Capital to acquire an 80.1% stake in Philips Lumileds division in California. Philips said the CFIUS had concerns with the deal. Soon after, Fairchild Semiconductor declined a takeover bid from China Resources Microelectronics and Hua Capital Management, citing concerns about CFIUS. Around the same time, Western Digital, the U.S. technology company, said that Tsinghua Unisplendour pulled the plug on a deal to acquire a 15% stake in the company.

Regardless of CFIUS scrutiny, Chinese acquisitions show no sign of slowing down. China’s “going out” policy is encouraging companies to invest overseas for macroeconomic reasons including slower appreciation of the Chinese yuan as well as maturation of Chinese economy and Chinese companies. The Chinese government has been actively promoting the internationalization of the Chinese yuan and also aiming to connect China with countries along the ancient silk route and a new maritime silk road via the “One Belt, One Road” initiative.

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