Experts are against US review of all Chinese deals

US experts said they are against the idea of having every foreign direct investment in the United States made by China's state-owned enterprises (SOEs) scrutinized by the Committee on Foreign Investment in the United States (CFIUS).

The US-China Economic and Security Review Commission has called for such a scrutiny several times, including in its annual report to Congress last month, alleging that the SOEs are used by the Chinese government to advance its national security objectives.

Andrew Hunter, a senior fellow at the Center for Strategic and International Studies (CSIS), said the working group of relevant experts it convened in the past year discussed the issue. He described the suggestion as moving away from CFIUS's voluntary filing approach.

"And the participants in the process, both private sector and government, basically agreed that that would likely be a bad idea," he said on Wednesday in a press briefing about a new report about CFIUS, an inter-agency committee of the US government that reviews national security implications of foreign direct investment (FDI) in the US.

Hunter, a former Pentagon official, explained that the suggestion could quickly overwhelm the system with excessive number of cases. "The quality of the reviews would go down very quickly," he said, adding that it would make the system less effective than it is today.

US lawmakers often politicize Chinese FDI in the US, both from private businesses and SOEs. On Monday, 20 US Congressmen wrote to US Treasury Secretary Jack Lew asking for the acquisition of US chip maker Lattice Semiconductor Corp by Canyon Bridge Capital Partners, a fund they alleged having ties to Chinese government, to be blocked over security concerns.

In October 2012, a report by the US House Intelligence Committee accused two Chinese telecom equipment manufacturers, Huawei Technologies and ZTE, of posing a national security threat to the US. Investments made by the two companies are well received in other parts of the world.

A Rhodium Group report early this month shows that some 80 percent of Chinese FDI in the US in recent years was made by private investors.

The CSIS report, written by Hunter and his colleague John Schaus and covering from 2008 to 2014, shows that during that period only two cases had been blocked by a US president since CFIUS was established. They both involved Chinese companies.

In 1990, President George W. Bush ordered China National Aero-Technology Import and Export Corp to divert its interest in MAMCO Manufacturing In. In 2012, President Barack Obama ordered the divesting of wind farm projects by the Ralls Corp, owned by Chinese individuals, citing the project's proximity to US military facility.

Last week, however, Obama blocked the 670 million euro ($723 million) buying of German company Aixtron by Grand Chip Investment from China's Fujian province over security grounds. On Thursday, Grand Chip said the deal had collapsed and that it failed because of the US ban.

China's Foreign Ministry called it "groundless accusations" against Chinese companies by the US and lamented the "politicization" of what it said was a commercial takeover.

A letter by 16 US lawmakers to US Comptroller General Gene Dodaro on Sept 15 called for more CFIUS scrutiny, citing the case of China’s Dalian Wanda, which bought the Legendary Entertainment, a Hollywood movie producer, in January. Wanda also bought AMC Theaters in 2012.

Hunter acknowledged that there is a perception of Chinese investments being subject to more reviews, but he said that the data does not support this.

The report found that the UK, Canada, China, France and Japan were the five countries with the most CFIUS reviews from 2008 to 2014. China leads the number of cases since 2012.

"When four of the five are close treaty allies of the United States, that tells me that this is a robust process for all foreign countries," Schaus said.

The report indicated that in the case of Wanda’s acquisition of AMC, concerns were raised about AMC theaters in US military bases. But Hunter said that the deal was given the green light means the CFIUS process is working and foreign investment from China is welcomed.

Schaus does not believe that a Bilateral Investment Treaty (BIT) being negotiated between China and the US will change the situation, citing that Canada is one of the most scrutinized not in terms of frequency.

"This may sound a little perverse, but in some ways, having more CFIUS reviews indicates that you're almost a closer industrial partner of the United States," Hunter said.

David Dollar, a senior fellow at the John L. Thornton China Center of the Washongton-based Brookings Institution, said a BIT would lead to a more balanced and stable investment relationship.

"China would have to open up its closed sectors, and that competition would be helpful for China's productivity growth. A BIT would ensure that Chinese firms have stable access to investing in the US," said Dollar, a US Treasury's economic and financial emissary to China from 2009 to 2013.

The CSIS report, which studied the years since Congress passed the Foreign Investment and National Security Act (FINSA) of 2007, found that CFIUS is working, but the risks in the process are potentially increasing and merit continued monitoring due to largely complex ownership structures of the acquiring firms. It also said there is a need for greater communication, in terms of both outreach and clarification of existing guidance documents.