On July 10, the U.S. Senate Committee on Agriculture held a hearing on the proposed $7.1 billion acquisition by China’s Shuanghui International of Smithfield Foods – the largest Chinese acquisition to date of a U.S. company, which was recently cleared by U.S. regulators. Although the hearing focused on food safety concerns relating to foreign acquisitions of U.S. firms, it publicly underscored a key emerging phenomenon in US-China relations: rising Chinese investment in the United States and related national security considerations.
Much as Japan Inc. caused a sensation with its buying spree in the eighties, acquiring prominent U.S. companies and landmarks, including Rockefeller Center, Chinese companies are making their presence felt. Acquisitions range from AMC cinemas to IBM’s personal computers unit. Prominent Chinese bids reportedly in the works include One Chase Manhattan Plaza in New York City and select assets of smartphone maker Blackberry in neighboring Canada.
Far from the Congressional spotlight, the little-known Committee on Foreign Investment in the United States (CFIUS) housed within the U.S. federal government reviews select inbound investments on national security grounds. CFIUS review seeks to balance free market principles that would keep the U.S. market open for business against national security considerations, specifically averting or mitigating foreign control of U.S. companies that are operating in potentially sensitive sectors.
CFIUS reviews are confidential, but what is public suggests that the record of Chinese companies investing in the United States is more robust than it may seem. Often eclipsed by those transactions that have unraveled, such as the failed $18.5 billion bid for Unocal by the China National Offshore Oil Cooperation (CNOOC) in 2005, in many cases investments have been approved. As the investment relationship between the world’s two largest economies evolves into “a two-way street,” China Inc.’s interface with CFIUS will be increasingly important for policymakers to understand and to insulate from politicization, to allow for careful and considered review by the regulators.
Coming to America
China’s investment profile is rapidly changing. The Economist Intelligence Unit projects that China will be a net global investor within four years. This investment is steadily diversifying. Whereas in 2010, energy deals made up 30 percent of outbound deal activity, they accounted for only 24 percent in 2012. While the top destination last year was the European Union, 2012 witnessed record Chinese investment in the United States: $6.7 billion worth of deals. This record will prove short-lived. In the first nine months of 2013 alone, Chinese firms spent nearly $12.2 billion on projects in the United States.
Chinese state-owned firms are not the only players. Private Chinese firms spent more on U.S. deals in the past fifteen months as of April 2013 than in the last eleven years combined. As of September 2013, private Chinese firms led by Shuanghui accounted for 84 percent of deals and 74 percent of total investment value this year. State governments are actively competing for this investment and the derivative jobs (California, New York, Texas, Illinois, and North Carolina are in the lead) with Chinese investment reportedly currently providing 33,000 U.S. jobs – expected to touch 70,000 with the close of the Smithfield deal.
Congress has tasked the executive branch with weighing the value-add of such inflows against their risks. As a result, unsurprisingly, a key issue in the U.S.-China investment relationship from the Chinese perspective has become the CFIUS review process. According to China’s Commerce Minister, the review process needs to be “more open and transparent, because companies never know whether their bid meets the requirements or not…We need clearer guidelines on what conditions might violate U.S. security, to reduce risk for companies that want to invest.” Such comments highlight the important if largely unknown role CFIUS plays in US-China relations.
What Is CFIUS?
Established in 1975, CFIUS is an inter-agency committee in the federal government that includes the heads of the following departments and offices: Department of the Treasury (chair); Department of Justice; Department of Homeland Security; Department of Commerce; Department of Defense; Department of State; Department of Energy; Office of the U.S. Trade Representative; and Office of Science & Technology Policy.
CFIUS operates pursuant to the 1988 Exon-Florio Amendment to the 1950 Defense Production Act – an amendment prompted largely by concerns regarding Japanese acquisitions in the United States. Exon-Florio authorizes the president to suspend, block, or otherwise modify transactions prior to closing that could result in foreign control of U.S. businesses engaged in inter-state commerce in the United States – if such control threatens to impair U.S. national security. It also authorizes the president to seek divestment or other relief in the case of concluded transactions.
To avert the risk of a transaction being blocked, both the potential foreign acquirer and the U.S. “target” company generally assess with legal counsel at the onset whether CFIUS might view the latter’s activities as sensitive. If so, they file a joint voluntary notice with CFIUS, which reviews the transaction as a “covered transaction” over a 30-day period followed by, if need be, a 45-day investigation. Importantly, CFIUS can also initiate a review of a transaction on its own accord.
A key determination in the review is what level of foreign control and areas of activity raise national security concerns. Exon-Florio and subsequent legislation and regulations only provide a number of non-exclusive risk factors. This ambiguity is double edged: it provides needed room for evolving concepts of national security, such as cyber, at the cost of the predictability that the private sector requires. Like other foreign companies, Chinese firms have had to navigate this ambiguity – albeit in the context of the overarching strategic dynamic in U.S.-China relations.
The Case of China Inc.
No complete picture is possible of how Chinese firms are faring under CFIUS review as CFIUS discloses neither whether specific firms have filed for review nor the outcome. Analysts and practioners rely largely on disclosures by the parties through press releases or corporate filings. The perception is that Chinese firms attract considerable CFIUS scrutiny. Based on generalized CFIUS statistics, however, topping the list for review are companies not from China but from the United Kingdom. Between 2009 and 2011, U.K. firms accounted for 26 percent of notices filed with CFIUS involving transactions subject to CFIUS review; Chinese investors accounted for only 7 percent. According to the CFIUS CY 2011 Report to Congress, the latest such report, Chinese firms were involved in 10 covered transactions in 2011 – behind those from France (14) and the U.K. (25).
To be sure, the report has significant gaps. For example, it does not and cannot account for Chinese companies dissuaded from investment due to apprehensions regarding Congressional scrutiny and a potentially negative review outcome. The trend, however, is for companies – including Chinese firms – to increasingly file notices out of an abundance of caution. Just as overall notices filed with CFIUS have increased from 65 to 111 over the 2009-2011 period, so too have notices from Chinese companies – up two percentage points from the 2008-2010 period.