China U.S. Buying Spree Prompts Move to Toughen Deal Reviews
(Bloomberg) -- A rising tide of Chinese deal-making in the U.S. is spurring Congress to propose tighter measures to restrict investments that are increasingly viewed as a threat to America’s national security.
Lawmakers in Washington 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 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.
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. 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.
"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.
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.
Pending deals include Ant Financial’s $1.2 billion takeover of MoneyGram International Inc., Genworth Financial Inc.’s $2.7 billion sale to China Oceanwide Holdings Group Co. and a bid by chipmaker Broadcom Ltd., which has headquarters in Singapore as well as San Jose, California for Brocade Communications Systems Inc.
Chinese conglomerate HNA Group Co. is also trying to buy a stake in SkyBridge Capital LLC, the fund-management firm founded by Anthony Scaramucci, who was briefly Trump’s White House communications director.
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."
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.
Advocates promoting deals with China expressed concern about the proposed restrictions.
Tony Fratto, a Republican communications consultant whose firm is working on Ant Financial’s third attempt to win approval for its takeover of MoneyGram, said it’s important that Congress appreciates the benefits of foreign direct investment.
"It is very easy for domestic interests to cloak protectionism in the guise of national security," Fratto, a former assistant secretary of the Treasury under President George W. Bush, said in an email. "Not only would that be self-defeating in the U.S., it opens a huge door for other countries to run through."
Richard Sawaya, vice president of the National Foreign Trade Council, a group that promotes business between the U.S. and China, said that the proposed legislation could "carry many unforeseen consequences."
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."
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