Sinica Pecunia Olet

In New Slap at China, U.S. Expands Power to Block Foreign Investments

By Alan Rappeport

The Treasury Department said it would expand its reviews of Chinese investments in the United States, using new powers approved by Congress.

WASHINGTON — The Trump administration said on Wednesday that it would more aggressively police foreign investment in the United States, outlining a rigorous review system that is aimed primarily at preventing China from gaining access to sensitive American technology.
The investment restrictions will allow the United States to block a far wider array of Chinese transactions that are deemed a threat to national security, including minority stakes and joint ventures in technology, telecommunications and other cutting-edge companies.
While Congress passed the expanded review system into law this summer, the administration signaled that it would apply its new authority very broadly and would review any foreign transaction involving a business that designs or produces technology related to 27 industries, including telecom, semiconductors and computers. 

Foreign investors will be required to submit declarations notifying the panel of their intentions when making a bid and could be assessed a fine up to the value of the transaction if they fail to comply.
The toughened investment regime will apply to all countries but is aimed largely at China, which President Trump has accused of trying to gain access to valuable American technology through nefarious means. 

The White House has criticized China for trying to obtain trade secrets by investing in United States companies, pressuring domestic firms doing business in China to hand over intellectual property and committing outright cyberespionage.
On Wednesday, a Chinese intelligence official was arrested in Belgium and brought to the United States to face espionage charges, further escalating the China crackdown. 

Law enforcement officials said the official tried to steal trade secrets from GE Aviation.
The administration has already taken several steps to stop Beijing from harnessing American technology in critical sectors, such as the next generation of 5G wireless technology, and to thwart China’s strategic plan to dominate cutting-edge industries, known as Made in China 2025. 

It has imposed tariffs on $250 billion worth of Chinese goods as a form of punishment and has threatened to tax all Chinese imports if Beijing does not change its trade practices.
But the foreign investment review takes things up a notch and threatens to exacerbate tensions between the world’s two largest economic powers, which have engaged in a tit-for-tat trade war and increasingly harsh exchanges about each other’s policy and approach.
Chinese officials canceled a trip to Washington late last month to resume trade talks after President Trump moved ahead with a second round of tariffs. 

On Monday, China’s foreign minister, Wang Yi, chided the Trump administration for “ceaselessly elevating” trade tensions and “casting a shadow” over relations between the two countries. 

Secretary of State Mike Pompeo, who was visiting Beijing for talks, said the United States had a “fundamental disagreement” with China on the issues that it raised.
The Treasury Department said on Wednesday morning that it would begin a pilot program using new powers under the Foreign Investment Risk Review Modernization Act. 

The law expanded the purview of the Committee on Foreign Investment in the United States, or Cfius, an interagency panel led by the Treasury Department that can block acquisitions on national security grounds, and the department is moving swiftly to take advantage of its new tools.

Until now, only takeovers and controlling stakes in American companies could be reviewed. 

Under the pilot program, Cfius will be able to review a much wider array of deals, including joint ventures and smaller investments by Chinese in American businesses that make technology deemed critical for national security reasons.
Beginning on Nov. 10, the panel can review — and block — a deal if a Chinese investor takes a stake in a business that makes sensitive technology and if that investor gains potential access to nonpublic technical information or can engage in substantial decision-making over the company, such as getting a board seat.
The new law, which passed with bipartisan support, gave the Treasury Department 18 months to develop rules to put the panel’s new powers into effect, but the program announced on Wednesday will allow it to be put in place more quickly.
“These temporary regulations address specific risks to U.S. critical technology while informing the development of final regulations that will fully implement Firrma,” Steven Mnuchin, the Treasury secretary, said, referring to the Foreign Investment Risk Review Modernization Act.
China has increasingly been looking to invest in high-tech industries in the United States. 

According to data from Public Citizen, a liberal advocacy group and think tank, 56 percent of Chinese investments in the United States last year were in industries that Beijing defines as “strategic,” such as aviation, biotechnology and new-energy vehicles — up from 25 percent in 2016.
But the administration’s trade measures have already chilled Chinese investment in the United States, which fell more than 90 percent from the first half of 2017 to the first half of 2018, to its lowest level in seven years, according to tracking by Rhodium Group.
The panel has already stepped up its scrutiny of deals under the Trump administration as the president looks to employ a more protectionist “America First” agenda.
Earlier this year, Cfius scuttled a proposed takeover of Qualcomm, the San Diego-based chip maker, by Broadcom, a rival that at the time had headquarters in Singapore, over concerns that it would pose a national security risk by depriving the United States of a telecom leader. 

It also refused to approve a $1.2 billion deal between MoneyGram, a money transfer company based in Dallas, and Ant Financial, a Chinese electronic payments company.
Republicans and Democrats in Congress have been generally united in their desire to crack down on Chinese theft of American intellectual property.
At a Senate hearing on homeland security on Wednesday, Senator Rand Paul, Republican of Kentucky, called on Cfius to review Broadcom’s proposed $18.9 billion acquisition of CA Technologies. 

He noted that the network systems of CA Technologies were deeply embedded in critical infrastructure facilities and national security agencies.
Nicole Lamb-Hale, head of the Cfius advisory practice at the risk management firm Kroll, said that the global nature of the new pilot program could have a chilling effect on businesses seeking foreign investment and that it would create additional hurdles for transactions. 

However, she acknowledged, with recent reports that Chinese spies have been using chips to infiltrate American companies, there is greater urgency to protect American intellectual property.
“I think that really brings into focus the concern that we are at a point where if we don’t do something very quickly, we’re going to be in a position where from a national security standpoint we’re at risk,” said Ms. Lamb-Hale, who previously handled Cfius matters at the Commerce Department.
President Trump was considering a more draconian plan that would have imposed sweeping investment restrictions on China last summer, but instead decided to support the proposal to grant Cfius more power. 

That decision was seen as a win for Mr. Mnuchin, who has been working behind the scenes to defuse the trade dispute.
But Mr. Mnuchin has also been showing signs of being less accommodating recently. 

In an interview with The Financial Times that was published on Wednesday, he said he was closely monitoring China’s currency, the renminbi, and noted that it had been falling this year. 

The administration has been concerned that China has been manipulating its currency to mitigate the effects of the tariffs, and he said the issue of competitive devaluations should be part of the broader trade negotiations.
Mr. Mnuchin is traveling this week to the annual meeting of the World Bank and the International Monetary Fund in Bali, Indonesia, where he will have the chance to explain the new changes to his counterparts from countries around the world in person.