China Threat

White House panel urges U.S. defence of clout in high-end chip market
Reuters

WASHINGTON -- A blue-ribbon presidential panel on science recommended on Friday that the United States take steps to defend its dominance of the high-end semiconductor market against a stiff Chinese challenge.
The report follows plans by China to use a massive, $150 billion government investment in its semiconductor industry to expand the share of Chinese-made integrated circuits in the domestic market from its current 9 percent. 

Semiconductor chips are used in everything from computers to automobiles.
The President's Council of Advisors on Science and Technology said the United States needed new tools to ensure China did not replace the United States as the leader in making high-end semiconductors that are key to national defence.
The report urged policy-makers to "respond forcefully" if Chinese economic policies, such as subsidies aimed at building Chinese expertise in semiconductors, limit the access of U.S. companies or thwart U.S. exports.
"The main goal here should be to deter dangerous Chinese actions," the report said.
Tools that could be used include the Committee on Foreign Investment in the United States (CFIUS), an inter-agency panel led by the Treasury Department that assesses Chinese investment to ensure it does not harm U.S. national security, the panel said.
Concern about China is one of the few areas where the administration of Barack Obama and President Donald Trump's incoming team appear to agree.
In November, U.S. Secretary of Commerce Penny Pritzker said the United Stated would not accept China's "$150 billion industrial policy designed to appropriate this industry."
Under Obama, CFIUS stopped a series of Chinese acquisitions of high-end chip makers. 

Last month, he upheld a recommendation by CFIUS to block Aixtron's 670 million euro ($717 million) sale to Fujian Grand Chip Investment Fund over national security concerns.
Last January, CFIUS prevented the sale by Philips of its U.S. lighting business to GO Scale Capital, made up of GSR Ventures, Oak Investment Partners, Asia Pacific Resource Development and Nanchang Industrial Group.

Chinese Access to U.S. Semiconductor Industry May Be Curbed

‘We are seeing new attempts by China to acquire companies and technology based on their government’s interests—not commercial objectives.’ — Commerce Secretary Penny Pritzker
By IAN TALLEY

The proposed sale of German chip-equipment maker Aixtron SE, which has a U.S. subsidiary, to Grand Chip Investment GmbH, the German unit of China’s Fujian Grand Chip Investment Fund, was blocked in December in the U.S. 

WASHINGTON—The Obama administration is finalizing a study that could lead to restrictions on Chinese investment in the U.S. semiconductor sector.
The report, being prepared by Barack Obama’s chief science adviser and due to be published before he leaves office this month, will include recommendations aimed at bolstering protection of an industry deemed critical to national security, according to people familiar with the study.
Among its recommendations could be a tougher stance by the Committee on Foreign Investment in the U.S., or CFIUS, a secretive multi-agency panel that reviews foreign acquisitions of U.S. assets for national security threats.
The report will give guidance to CFIUS on China’s strategic efforts to dominate the semiconductor market and could lead to new export controls and restrictions on joint-ventures with Chinese firms, according to industry officials.
The Obama administration’s dialing up of its scrutiny of Chinese investment in the U.S. is a rare alignment of policy with the incoming Trump team, which has promised a tough stance with the Asian powerhouse.
“A loss of leadership in semiconductor innovation and manufacturing could have significant adverse impacts on the U.S. economy and national security,” John Holdren, the president’s chief science adviser, said in October.
CFIUS, established in 1975 to protect national interests from foreign investment, is chaired by the Treasury Department and has members from the departments of Justice, Defense, State and at least five other executive offices. 

It has the power to unilaterally block mergers and acquisitions of U.S. assets by foreign investors, and can require terms preventing the transfer of sensitive information and technology deemed important to national security. 

Often mere notification of a review by the panel discourages deals. 

Most of its dealings are confidential and meetings secret.
The CFIUS panel has approved some Chinese deals in recent years, including a bid for the Chicago stock exchange. 

However it has already ratcheted up its oversight of proposed semiconductor acquisitions.
Last month it rejected the proposed sale of Aixtron SE of Germany—which has a U.S. subsidiary—to Grand Chip Investment GmbH, the German unit of China’s Fujian Grand Chip Investment Fund. 

The CFIUS panel also forced the withdrawal of two other Chinese acquisition targets in the U.S. over the past 24 months.
The U.S. government views the semiconductor sector as one of the nation’s most critical industries, given that it makes computer chips for everything from smartphones to missiles, satellites to energy grids. 

U.S. officials are concerned the Chinese could gain backdoor entry into just about anything related to national security, including communications and military weapon systems.
Commerce Secretary Penny Pritzker has cited Beijing’s $160 billion plan to establish itself as a global leader in the semiconductor industry as a threat to the U.S. and reason for the working group’s review.
“We are seeing new attempts by China to acquire companies and technology based on their government’s interests—not commercial objectives,” Ms. Pritzker said. 

“We will not allow any nation to dominate this industry and impede innovation through unfair trade practices and massive, non-market-based state intervention.”
Officials at China’s Ministry of Commerce and Ministry of Industry and Information Technology didn’t respond to requests for comment.
According to a report by the Rhodium Group consultancy for the U.S.-China Economic and Security Review Commission, a congressional advisory panel, Chinese investment in the sector outside of China jumped threefold in 2014 to $3 billion.
Ms. Pritzker said Mr. Holdren’s impending report, drafted with input from top industry executives and a former senior Central Intelligence Agency official, will provide the next president “with a blueprint for action” to help secure the U.S. semiconductor sector.
Former U.S. trade officials say the semiconductor brief could give the Trump administration added reason to increase oversight of Chinese investment in the U.S., in part to leverage better trade terms with China.
Industry and government officials are concerned current surveillance is insufficient. 

CFIUS reviews typically cover acquisitions, not investments where foreign companies build new operations in the U.S. from the ground up.
It is unclear, for example, whether deals such as the one inked earlier this year by Advanced Micro Devices Inc. to license its technology to China’s Tianjin Haiguang Advanced Technology Investment Co. would trigger a CFIUS review because it didn’t give the company control of the U.S. firm.
A bipartisan collection of U.S. lawmakers is gearing up to expand CFIUS’s legal mandate, in part to demand greater access by U.S. investors into China. 

Charles Schumer of New York, a top Senate Democrat, has urged the administration to boost scrutiny of Chinese investment deals, citing the failure of Chinese government to grant U.S. investors access in China.
The Government Accountability Office criticized the Department of Defense earlier this year for not adequately addressing the risk of foreign investment in real estate and other sectors near military training and testing ranges. 

In January, the GAO will explore whether the CFIUS law and administration reviews are strong enough to protect U.S. national security.
The U.S. semiconductor industry is facing an unprecedented wave of consolidations, with mergers and acquisitions in the sector valued last year at over $100 billion. 

Chinese officials see an opportunity: They launched a coordinated state strategy to boost its share of domestically made chips in its market from around 10% to 70% in the next 10 years, using a $160 billion state fund as its war chest.

Obama Moves to Block Chinese Acquisition of a German Chip Maker

By PAUL MOZUR

The headquarters of Aixtron, a maker of semiconductors, in Herzogenrath, Germany.

HONG KONG — President Obama on Friday moved to block a Chinese deal to buy a high-tech company on national security grounds, an unusual step that could set the stage for greater tensions between his successor, Donald J. Trump, and a Chinese government determined to bolster its technological capabilities.
The intervention in a Chinese company’s bid to buy a German semiconductor company, Aixtron, comes after Chinese companies have spent billions to acquire technology in Europe and the United States. 

American officials have increasingly moved to stop such deals, but Chinese companies have shown growing adeptness in getting around those restrictions to strike up relationships that could someday lead to greater access to technology.
A statement from the Treasury Department said the administration blocked the purchase of the American portion of Aixtron’s business because it posed a national security risk relating to “the military applications of the overall technical body of knowledge and experience of Aixtron.”
It wasn’t clear whether other parts of the deal could be salvaged. 

Officials at the German chip company and its would-be Chinese buyer, the Fujian Grand Chip Investment Fund, did not immediately comment.
By rejecting the deal, the Obama administration showed how far it would go to keep China from using its wallet to acquire sensitive technology from the West. 

It blocked previous Chinese technology purchases only indirectly, using an advisory panel of government and intelligence officials who can discourage — but not directly kill — foreign deals. That same panel earlier expressed skepticism over the Aixtron deal.
Last year the United States accounted for more than one-fifth of Aixtron’s sales. 

And nearly one-fifth of its more than 700 employees are based in the United States.
That indirect strategy kept Mr. Obama from looking like a free-trade opponent, especially when the company in question was not American, and softened any potential response from Beijing. 

But Aixtron and its Chinese suitor tested that strategy by plowing ahead despite the panel’s concerns, forcing Mr. Obama to act.
Mr. Obama’s cancellation sets a stronger tone as Mr. Trump prepares to take the White House. 

As president, Mr. Trump will have considerable power to appoint the members of that advisory panel, called the Committee on Foreign Investment in the United States. 

He is likely to hear from members of Congress who have been pushing to toughen up and to broaden the panel’s reviews to encompass more types of deals.
Mr. Trump has been critical of China’s trade practices.
“It could feed into the narrative about how the Trump administration is going to get better deals for things, and this is the kind of deal he wouldn’t allow because it would affect U.S. jobs and U.S. manufacturing capabilities in one of the areas where we’re still the most competitive,” said Adam Segal, a technology security expert at the Council on Foreign Relations.
Still, simply rejecting deals is not so simple, Mr. Segal and others say. 

Wall Street sometimes pushes for such deals to go through, arguing that American companies can use Chinese money to invest or save jobs. 

Steven Mnuchin, a Wall Street veteran, is Mr. Trump’s pick to be Treasury secretary, heading a department with considerable say over the advisory panel.
The panel is crucial to the outcome of future deals. 

Created in 1975 by President Gerald Ford, it includes representatives from 16 executive departments and intelligence agencies including Commerce, Defense, Justice and Homeland Security. 

It judges whether a foreign investment in companies with operations or business in the United States poses unacceptable security risks. 

Because its deliberations are confidential, little about it has been made public.
Just the prospect of such an investigation can be enough to kill a deal. 

Under Mr. Obama, its scrutiny scotched Chinese deals for a European lighting-panel maker and an American manufacturer of microchips.
But China has already been testing ways to get around the panel. 

Such methods do not necessarily give Chinese buyers access to crucial technology, but experts say they could open a route to access down the road.
In some cases, it has struck other types of deals with Western companies, like licensing agreements, outside of the panel’s jurisdiction. 

When the panel opposed a Chinese bid for the American semiconductor firm GCS Holdings this summer, the American company instead signed a joint venture to make chips with its would-be buyer. 

GCS makes an advanced chip with military uses.
A spokesman for GCS said the joint venture makes products like cellphone chips that have long been commercially available, and that it follows U.S. government guidelines for all technology exports, whether sensitive or not.
In another case, the Chinese appeared to be testing how far it could push the panel.
In September 2015, Tsinghua Unigroup, the main corporate vehicle for China’s microchip ambitions, offered $3.8 billion for a board seat and a 15 percent stake in Western Digital, a maker of hard-disk drives. 

Lawyers who specialize in Committee on Foreign Investment law say the deal structure was unusual: The size of the stake walked the line of where the panel has investigated in the past, and the agreement had a clause that allowed either side to call it off if the panel became involved.
To lawyers who studied the deal, it looked as if the Chinese buyer was trying to find out what it could get away with.
Tsinghua did walk away, citing the panel, and began to look for smaller deals. 

In April, it successfully took a 6 percent stake in Lattice Semiconductor, despite the fact that in 2012 the Federal Bureau of Investigation indicted two Chinese men who it said illegally tried to procure chips from the company that could be used on spacecraft. 

In filings, Tsinghua said the stake had been taken for “investment purposes,” while Lattice has said military applications were only a tiny part of its business.
Tsinghua has since sold some of its stake, and Lattice is now the target of a new acquisition offer by a venture capital firm based in Silicon Valley but backed by Chinese government money. 

Lattice did not immediately respond to a request for comment.
Because information relating to its decisions is kept secret, the Committee on Foreign Investment in the United States remains one of the least understood parts of the United States government. 

The companies involved in the deal sometimes do not find out why a proposed acquisition was rejected.
Foreign companies applying for approval have to submit information about corporate ownership, including passports and records of the military experience of shareholders. 

Emails go out across American military research and development laboratories to check whether companies might unwittingly be important to American security. 

For instance, some seemingly harmless technology may be a component of an American defense project.
Companies can discuss with the committee what they will do if the proposed deal causes a public backlash, as has happened before. 

The committee can recommend changes or broker agreements that could include the sale of a sensitive part of the company.
The panel has considerable investigative and intelligence resources at its disposal, but the new influx of Chinese money has led some to argue it does not provide enough protection. 

Critics say it can examine each deal only in isolation and not consider a more widespread campaign of purchases.
Stewart Baker, a former representative to the committee under the Department of Homeland Security, also cites resources as an issue.
“My sense is they do have the resources now,” he said, “but if Chinese deal flow continues to increase, it is going to be a challenge.”

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.

Chinese Peril: The U.S. Is Leaning on Germany to Block a Chinese Takeover.

It already killed a Chinese bid for Philips LumiLED business
By Reuters

The US is getting very touchy about Chinese access to LED technology.

U.S. intelligence services warned Berlin that a now on-hold Chinese takeover of German semiconductor equipment maker Aixtron could give Beijing access to technology that could be used for military purposes, business daily Handelsblatt said.
The German Economy Ministry said Monday it had withdrawn its approval for Fujian Grand Chip Investment Fund (FGC) to buy the Aachen-based firm for 670 million euros ($732 million), citing security-related information.
The ministry declined to comment further in light of the Handelsblatt report on Wednesday and said it could give no details on the “origin or the nature” of the information that led to clearance being withdrawn.
A spokeswoman added the review would likely take between two and three months once the ministry had collected all relevant documentation.
Aixtron shares dropped 7.1% in Frankfurt Wednesday to a five-month low of 4.84 euros, well below the 6 euros per share that FGC had offered shareholders for their stock.
The newspaper, citing German intelligence sources, said U.S. authorities had shown representatives of German ministries evidence last Friday, at a meeting at the U.S. embassy in Berlin, although they refused to hand it over.
Concern is growing in Berlin about losing key technology to China after a string of Chinese acquisitions of German companies, including robotics group Kuka AG. 

However, many are niche companies that, while dominant in their particular specialties, are nowhere near big enough to deter predators from China, which has spent nearly $200 billion on foreign acquisitions this year alone.
Aixtron sells its equipment, which is used to deposit chemical layers on silicon wafers, mainly to LED (light-emitting diode) chipmakers. 

It is not designed for military purposes but analysts say it could be adapted, with some difficulty.
The U.S. Committee on Foreign Investment in the United States (CFIUS), which reviews takeovers from a national security perspective, in January blocked a plan by Dutch company Philips to sell its Lumileds LED business to Chinese buyers.