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China-U.S.
Say No to Unwritten Investment Restrictions
Chinese companies should stand up for their rights and say no to unfair treatment
 NO. 15 APRIL 14, 2016

 

(LI SHIGONG)

Recently, the Committee on Foreign Investment in the United States (CFIUS) stopped two Chinese investments. In January, CFIUS blocked the $3.3-billion sale of Philips' lighting unit to a Chinese consortium. In February, China's Unisplendour Corp. Ltd. terminated a deal to acquire a 15-percent stake for $3.8 billion in Western Digital Corp. following a decision by CFIUS to conduct an investigation into the purchase. It is safe to say that CFIUS is the "No.1 killer" of Chinese investments in the United States.

CFIUS is an inter-agency committee authorized to review foreign investment, chaired by the U.S. secretary of the treasury and consisting of members including secretaries of justice, homeland security, commerce, defense, state and energy, and U.S. trade representative. It is an organization that makes investigations in order to determine the so-called impact of such transactions on national security in the United States.

There are other examples of blocked bids such as Chinese oil giant CNOOC's failed acquisition of the U.S. energy company Unocal in 2005 and Chinese machinery maker Sany Group's purchase of a U.S. wind farm project, which involved a lengthy legal battle from 2012 to 2015. Chinese chemical maker ChemChina's February deal to buy Swiss pesticide giant Syngenta for $43 billion also aroused concern from U.S. law makers, who believed that the deal would pose food safety or national security risks. The possibility that CFIUS may step in cannot be ruled out.

Chinese telecom equipment maker Huawei Technologies has often been the target of CFIUS investigations. In 2008, Huawei and Bain Capital's deal to purchase U.S. digital electronics manufacturer 3Com was banned by CFIUS for its alleged threat to U.S. national security. In 2010, Huawei's bidding for a network upgrade operation for U.S. telecom company Sprint Nextel also failed out of national security reasons.

In 2011, due to opposition from CFIUS, Huawei also withdrew its agreement to buy the assets of 3Leaf Systems, which offers server virtualization solutions to the enterprise data centers, for a mere $2 million. In the 3Leaf case, Huawei was irritated and criticized CFIUS for treating it unfairly.

As a result of frequent CFIUS interventions, one could see the potential for discrimination against investments from China via unwritten rules.

These unwritten rules are comprised of two key factors: China and America's national security. All Chinese investments are reviewed by U.S. politicians through a magnifying glass, and may even end up distorted. Any hints they find that can be hyped by the media will be played up. National security is one of the most important priorities of the United States. Consequently, other principles, including free trade, have to give way.

Is the national security of the United States--the most powerful country in the world--so fragile? In fact, what we can discern from America's hand in the acquisition failures is not a capacity to conduct rigorous investigations, but a heightened sense of imagination. For example, the United States claimed that certain Chinese companies were backed by the military, or that some American software would be taken advantage of by China, etc. All of these actions are part of a refusal to grant Chinese companies the adequate treatment they deserve.

Some media reports have concluded that foreign investors have to wise up after encountering the series of hidden obstacles. There are four unspoken principles in investing in the United States: First, foreign investors should acquire a minority stake instead of an entire company.

Second, they should make it clear beforehand that the acquisition will not steal corporate control or change the structure of the board.

Third, foreign investors should contact relevant U.S. institutions or some key figures in private beforehand.

Fourth, deals involving sensitive industries like petroleum should be avoided, because even acquiring a small stake in these industries may lead to a problematic disturbance.

Gradually, many Chinese companies have embarked on acquisition deals according to those so-called principles. However, we must see that such a compromise is not a natural way to make investments. It puts Chinese investors at a great disadvantage.

It takes efforts from both sides to establish normal bilateral trade and investment relations. The United States should obey international rules and abandon unwritten ones against foreign investors. Meanwhile, Chinese companies should stand up for their rights and say no to unfair treatment.

This is an edited excerpt of an article published in Economic Information Daily 

Copyedited by Bryan Michael Galvan

Comments to yushujun@bjreview.com 

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