Chinese Peril: President Trump Weighs Use of Emergency Law to Curb Chinese Takeovers

Goal is to clamp down on acquisitions of sensitive technology
President Trump asked Treasury secretary to act on Chinese investments

By Andrew Mayeda, Saleha Mohsin, and David McLaughlin

The Trump administration is considering a crackdown on Chinese investments in technologies the U.S. deems sensitive by invoking a law reserved for national emergencies, among other options, according to people familiar with the matter.
Treasury Department officials are working on plans to identify technology sectors in which Chinese companies would be banned from investing, such as semiconductors and so-called 5G wireless communications, according to four people with knowledge of the proposal, who spoke on the condition of anonymity.
The investment curbs would be the latest step in President Donald Trump’s plan to punish China for violations of American intellectual-property rights. 

The president asked Treasury Secretary Steven Mnuchin to consider investment restrictions on Chinese firms after the administration released the results of its probe into China’s IP practices last week.
While investors have so far focused on President Trump’s plan to impose tariffs on Chinese imports, new restrictions could deepen a slowdown in Chinese investments in the U.S. since President Trump took office.

“There will be limitations on Chinese investment,” Commerce Secretary Wilbur Ross said Tuesday in an interview on Fox Business Network. 

Pending legislation in the Senate and House to bulk up the Committee on Foreign Investment in the U.S., the panel that currently reviews foreign takeovers, will be part of the response, Ross said, adding that Trump will take “other action.”
The S&P 500 Index dropped 1.7 percent Tuesday, extending this month’s decline, on concern about heightened trade tensions between the world’s largest economies. 

Asian equity markets retreated Wednesday.
“The trade issue and uncertainty related to that is not going to fade in one day because all of a sudden we started thinking that we would reach some sort of a settlement with China,” said Krishna Memani, chief investment officer at OppenheimerFunds Inc. 

“This is going to be somewhat of a long process for things to settle down.”
Earlier this month, the U.S. president rejected Broadcom Ltd.’s hostile takeover of Qualcomm Inc., sending a message that his administration won’t look kindly on any deal that would give China an edge in critical technology. 

Although Broadcom is based in Singapore, China loomed large in the decision, because Qualcomm is locked in a race with China’s Huawei Technologies Co. to dominate the development of next-generation wireless technology.
Last year, President Trump blocked the takeover of chipmaker Lattice Semiconductor Corp. by a private-equity firm backed by a Chinese state-owned asset manager.

If conflicts escalate, China may consider reciprocal measures on more agricultural products, aircraft, automobiles and semiconductors from the U.S., the official Economic Daily reported Wednesday, citing Gu Xueming, director of the Commerce Ministry’s Chinese Academy of International Trade and Economic Cooperation.
President Trump gave Mnuchin 60 days from March 22 to propose executive actions the president can take to address concerns about Chinese investments in industries or technologies “deemed important” to the U.S.
Treasury officials are looking at ways to impose tougher conditions on Chinese firms using legislation that underlies CFIUS, which currently vets foreign takeovers on a case-by-case basis. 

But they are also weighing the use of a law that enables the president to regulate commerce in a national emergency, two of the people said.
The International Emergency Economic Powers Act, enacted in 1977, allows the president to declare a national emergency in response to an “unusual and extraordinary threat.” 

After declaring such an emergency, the president can block transactions and seize assets.
“It’s never been used in connection with unfair trade practices, but it’s broad enough that you could put restrictions on a wide variety of transactions,” said Christian Davis, an international trade lawyer at Akin Gump Strauss Hauer & Feld LLP in Washington.

Strict Reciprocity
The Trump administration is considering enforcing strict reciprocity on Chinese acquisitions, meaning U.S. regulators would only approve deals in sectors in which American companies are allowed to invest, according to two of the people familiar with the matter. 

China restricts or bans foreign investment in a range of industries, from car manufacturing to telecommunications providers and rare-earth exploration.
The Trump administration hasn’t finalized its plans, and the options under consideration could still change, the people familiar with the matter said.
Enforcing sweeping bans on Chinese investment would mark a major departure from the existing CFIUS process, which reviews individual transactions to determine if it threatens U.S. national security. 

The administration could use CFIUS legislation to declare a policy that Chinese investment won’t be allowed in entire industries deemed sensitive, such as microchips and telecommunications, said Davis, the Akin Gump lawyer.
“The question is how different is that from what CFIUS is doing already with respect to Chinese investments in sensitive sectors,” he said. 

“Depending on how these restrictions are implemented, the answer may be not much.”
Republican Senator John Cornyn and Republican House member Robert Pittenger have introduced legislation that would expand the power of CFIUS to review foreign investments. 

Mnuchin has been supportive of the bill, which would broaden the scope of reviewable technologies to include investments in “critical” technologies.
Acquisitions by Chinese firms in the U.S. fell to $31.8 billion last year from $53 billion the year before, according to data compiled by Bloomberg.

Chinese Peril

France's newly elected president wants to curb Chinese takeovers in Europe's strategic industries
Reuters
French President Emmanuel Macron attends a ceremony marking the 77th anniversary of late French General Charles de Gaulle's appeal of June 18, 1940, at the Mont Valerien memorial in Suresnes.

French President Emmanuel Macron vowed on Thursday to convince China’s closest allies in Europe that curbing foreign takeovers in strategic industries was in their interest, warning EU governments not to be naive in global trade.
Smaller eastern and southern European economies that are dependent on Chinese investment have rejected any steps against Beijing, even going as far as to block EU statements criticising China’s human rights record.
But Macron, at his first EU summit, said being an attractive destination for investment did not mean exposing Europe to what he termed “the disorder of globalisation”, as he seeks to make good on a campaign pledge with a so-called protective Europe.
“Things are changing because we see the disorder of globalisation and the consequences in your own country. I want to build an alliance around this idea,” Macron told a news conference during the summit of EU leaders. 

“I am for free trade ... but I am not for naivety.”
State-owned ChemChina’s US$43 billion purchase of Swiss pesticides and seeds group Syngenta, Beijing’s biggest overseas sale to date, has deepened concerns in Europe that the bloc is ceding control of its advanced technology, EU diplomats said.
Macron, who defeated the anti-Europe, far-right leader Marine Le Pen last month, said that he had always been a defender of globalisation and free trade during his time as minister but that leaders should hear from workers hit by globalisation.
The issues of globalisation and “social dumping” took centre-stage in France’s campaign after Le Pen used the relocation of a Whirlpool factory in northern France to Poland to paint Macron as a globalist who did not care about workers.
A free-trade advocate, Macron let several national corporate champions be taken over by foreign firms as a minister. 

But since his election he has sought to drum up support in Europe for what he calls a “protection agenda”.
Logo of Syngenta on it's plant in Muenchwilen.

He has found some support from Germany and Italy. 

EU leaders will agree on Friday to allow the European Commission to explore ways to limit foreign takeovers in areas such as energy, banking and technology, where China seeks Europe’s know-how.
In a statement, leaders will ask the Commission “to examine the need and ways to screen investments from third countries in strategic sectors, while fully respecting members states’ competences,” a reference to national sovereignty on the issue.
Berlin, Paris and Rome are upset that the Commission, the bloc’s competition regulator, approved ChemChina’s purchase of Syngenta while China maintains restrictions on EU investment.
Chinese direct investment in the European Union jumped by 77 per cent last year to more than 35 billion euros (US$38 billion), compared with 2015, while EU acquisitions in China fell for the second consecutive year, according to the Rhodium Group.
But free-trade advocates such as Sweden want to avoid any measures that might contradict the bloc’s rejection of the protectionism promoted by US President Donald Trump.

Enough is enough: Germany gets tough on Chinese takeovers

By Michelle FITZPATRICK

Economy Minister Sigmar Gabriel
Germany's economy ministry says it has withdrawn its approval for Chinese Grand Chip Investment's 670-million-euro purchase of Aixtron, citing security concerns
Alarmed by a raft of Chinese takeovers, Germany is putting the brakes on the Asian giant's shopping spree as it sends out the message that not everything is for sale.
The more assertive noises coming out of Berlin are likely to dominate Economy Minister Sigmar Gabriel's trip to China in the coming days, putting to the test the oft-vaunted "special relationship" between the top export powers.
Germans have watched with unease as Chinese enterprises have swallowed up a record number of homegrown tech companies this year, sparking fears of German knowhow and intellectual property being sold off to the highest bidder.
The wave of acquisitions has also stoked grumbles over China's easy access to the country's open markets, often through state-backed companies, while foreign investors there face tight restrictions.
"Germans seem to be growing more and more sceptical about China, and consequently more willing to pursue a tougher approach to Beijing," said analyst Hans Kundnani from the German Marshall Fund.
In the clearest sign yet that Berlin could be squaring up for a battle, the German economy ministry this week said it was taking a closer look at two planned Chinese takeovers -- effectively stalling both deals.
The moves have not gone unnoticed in Beijing and Gabriel will likely face some prickly questions when he leads a 60-strong business delegation on a five-day trip to China and Hong Kong from Tuesday.
Germany's first punch came last Monday when the ministry said it had withdrawn its approval for Grand Chip Investment's 670-million-euro ($730-million) purchase of chip equipment maker Aixtron, citing security concerns.
German daily Handelsblatt said the surprise reversal came after US intelligence services warned that Aixtron products could be used for military purposes.
The deal is now back under review, a process that could last three months.
Days later, the economy ministry said it was also reviewing the mooted sale of German firm Osram's general lighting unit to a Chinese buyer.
So far there has been little official reaction from Beijing.
But a bylined commentary carried by the official Xinhua news agency was scathing, accusing Germany of "protectionist moves" that called into question "Berlin's sincerity in securing an open and transparent investment climate".
"It is time for Berlin to let go of its delusional "China threat" paranoia," it added.

- Call for EU action -
Chinese firms spent over 11 billion euros on German companies between January and October, a new record, according to accountancy firm EY.
Included in that is the 4.6-billion-euro purchase of leading robot maker Kuka by Chinese appliance giant Midea, a deal that sparked particular alarm and which Gabriel had sought to thwart.
Gabriel, also Germany's vice-chancellor, has since drawn up a list of proposals to give European Union governments greater powers to block takeovers by non-EU firms in strategic industries.
Crucially there has been no word yet on whether Chancellor Angela Merkel -- who has championed close economic ties with Beijing -- approves of the idea.
But Gabriel is likely to get a sympathetic hearing from at least some European peers.
The new British government recently delayed the controversial Hinkley Point nuclear project over concerns about China's involvement, before eventually giving it the go-ahead.
In Brussels, an in-depth EU antitrust probe is holding up state-owned ChemChina's proposed mammoth takeover of Swiss seed maker Syngenta.

- Level playing field -
Observers, however, say Germany is not about to close the door on China, one of its most important trade partners.
Rather, the latest manoeuvres should be seen as part of a growing debate about how "to get a level playing field" with China, Kundnani told AFP.
Gabriel himself told reporters this week foreign investment with China could not be "a one-way street".
"We would like reciprocity," he said.
Foreign investors have long complained of the obstacles to doing business in China, such as the requirement to team up with local partners, while some sectors are completely off-limits.

China's Dirty Money

U.S., EU Say 'No' To China Buying The World
By Gordon G. Chang

Regulators on both sides of the Atlantic, acting as if on cue, are moving to block acquisitions of local businesses by Chinese companies.
Berlin, long open to Beijing’s investments, has just retracted its clearance of the $729 million purchase of chipmaker Aixtron by Fujian Grand Chip Investment Fund.
The move came just days before Berlin proposed EU rules giving member states the authority to stop Chinese takeovers in strategic sectors, especially when the potential acquirers are state entities. “We need to have the powers to really investigate deals when it is clear that they are driven by industrial policy or to enable technology transfers,” said Deputy Economics Minister Matthias Machnig.
Current German law permits the government to stop acquisitions of only defense companies, IT security firms, and businesses handling state documents.
German officials are not the only group worried. 

China’s largest foreign acquisition looks like it might run aground in Brussels. 

EU antitrust regulators have started a review of China National Chemical Corp.’s bid to buy Syngenta, the Swiss agribusiness giant, for $44 billion.
Even not counting the Aixtron and Syngenta deals, European regulators have blocked almost $40 billion in Chinese takeovers of businesses since the middle of 2015 according to Grisons Peak, an investment bank.
The blocking of acquisitions comes after a wave of Chinese investment. 

Grisons Peak puts the highpoint of China’s purchases at $95.6 billion in the first quarter of this year. Since then, takeovers have trended down, with just $49.4 billion in Q2 and $46.1 billion in Q3.

In the U.S., this month it was reported that, due to concerns raised by the Committee on Foreign Investment in the United States, Blackstone Group called off the sale of Hotel del Coronado to China’s mysterious Anbang Insurance Group.
CFIUS, as the Federal interagency body is known, was also thought to be responsible for the killing of the sale of the lighting-components business of Royal Philips NV to a Chinese group led by GO Scale Capital for $2.8 billion in January.
So far, the U.S. has welcomed Chinese capital. 

As the Rhodium Group has reported, Chinese entities invested $18.4 billion in the U.S. in the first half of 2016, almost three times the $6.4 billion in the same period a year earlier and more than that invested all last year.
That upward trend—Rhodium calls it “tripling down on America”—may not last long. 

Ali Meyer of the Washington Free Beacon, the online news site, reports that the U.S.-China Economic and Security Review Commission, in its next annual report, will recommend that Congress give CFIUS the authority “to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies.”
“The Chinese Communist Party continues to use state-owned enterprises as the primary economic tool for advancing and achieving its national security objectives,” notes the “final draft” of the Commission’s report. 

“There is therefore an inherently high risk that whenever a state-owned enterprise acquires or gains effective control of a U.S. company, it will use the technology, intelligence, and market power it gains in the service of the Chinese state, to the detriment of U.S. national security.”
There are many reasons for the concern in the EU and America over Chinese investment, but a common theme, as Commission member Larry Wortzel notes, is fairness. 

“There is no reciprocity,” he told the Free Beacon. 

“While Chinese companies can buy U.S. or Western companies, American and other Western companies are barred from buying key sector state-owned enterprises, if not all state-owned enterprises.”
And in Berlin the business community, which is skeptical of new curbs on Chinese investment, has expressed the same general concern. 

“The European economy must be allowed to do in China what the Chinese are allowed to do in Europe,” said Ulrich Grillo, head of BDI, a German industry association, to the Financial Times.
For decades, Washington, Brussels, and other capitals have not insisted on fair treatment for their companies, largely because of the lure of the Chinese market, but now that market is showing signs of softness in most segments.
Perhaps the best proof of the softness in China is the rush by Chinese entities to buy foreign assets. Although some acquisitions by state and private enterprises seem to be at the direction of the state, many deals are evidently not.
Last year, net capital outflow could have been as much as the $1 trillion reported by Bloomberg. Beijing has tried to staunch the outbound flow with drastic measures, but this year the outflow could be close to that staggering figure.
The outflow will undoubtedly pick up as the renminbi continues its decline.

So far this year, the Chinese currency is down 4.4% against the greenback. 

The yuan will almost certainly weaken further when American interest rates go up, as Fed Chair Janet Yellen signaled in September, and as the Chinese central bank decreases support.
The fall of the renminbi tells us the Chinese people have lost confidence in their economy and society. 

A study just released by Hurun Report states over 60% of China’s rich plan to invest in overseas residences in the next three years.