Invest in the US - May 25, 2018

Chinese investment in the United States has been frequently in the news in the first half of 2018, with several proposed changes on the table in the executive branch as well as Congress. Despite the deals announced by President Trump during his trip to China in November, 2017 ended with a significant slouch in Chinese investment in the US. Volatility in the US-China trade relationship and tougher policies on the horizon are likely to cause continued hesitation in new investments by Chinese companies. Chinese policy has also contributed to the slowdown in outbound investment, as reported in the previous issue of USCBC’s Invest in the US updates.  

Expanding restrictions on Chinese investment by Congress

In Congress, a revised draft of the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) moved forward this week. The bill would expand the scope of deals covered by the Committee on Foreign Investment in the United States (CFIUS). The House Financial Services Committee and Senate Banking committees held markups this week of the legislation, and passed revised versions of the bill unanimously. After significant changes to reflect congressional concerns and industry advocacy, it is now receiving bipartisan support.

The versions of the bill passed by both committees would expand scrutiny of real estate transactions and start-up company acquisitions, but would not affect outgoing US investment. That provision, which was particularly concerning to the business community, was removed from CFIUS jurisdiction under the bill and instead will be pursued under reforms to US export controls.

CFIUS legislation is likely to be passed by Congress before the August break, or potentially sooner if added to the National Defense Authority Act (NDAA), a must-pass bill. The House passed the NDAA today without the CFIUS reform provisions, but the Senate is expected to include the revised FIRRMA text in its version of the bill, which is currently slated to be considered by the full Senate in the coming weeks. If that occurs, the CFIUS changes would be discussed when the two chambers reconcile the bill in conference

Executive branch actions

Changes to the investment regime are expected through the executive branch in coming months as well. As part of the Trump administration’s Section 301 report on China’s intellectual property and technology transfer policies, the Treasury Department was instructed to propose changes to restrictions of Chinese investment in the United States, based on national security. Treasury Secretary Mnuchin  personally updated President Trump on the department’s progress, meeting the deadline of May 21 that was included in the presidential memo that started the process, but no details were made public.

As legislation in Congress on investment restrictions becomes increasingly likely to pass, some observers have speculated that the executive branch-led restrictions may cover specific sectors, which are not in the FIRRMA legislation, rather than changing the types of deal structures covered by CFIUS, such as joint ventures. As noted in previous USCBC reporting, the president may use the International Emergency Economic Powers Act (IEEPA) to impose unilateral investment restrictions based on national security concerns. Executive action under the Section 301 investigation on investment restrictions is required by August--one year after the investigation was begun. However, the President could use IEEPA to restrict foreign investment at any time.

Difficult deal-making climate

Several major deals between the US and China have been slowed or prevented in the first half of this year. Concerns about failed CFIUS deals have led to a major drop in applications, with Rhodium Group reporting less than $5 billion of pending Chinese acquisitions at the end of the first quarter of 2018--the lowest level in three years.
Among the deals that have been affected as a result of US national security concerns this year:

While US-China trade discussions could decrease general tension in the relationship, this seems unlikely to affect the trend of increased restrictions on Chinese investment in the US. It remains to be seen whether Chinese investment levels will continue to drop as a result of changes, or if investors will redirect money to less sensitive areas of the US economy.