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January 19, 2018

Summary

Citing potential “malicious actors” and national security risks, early in the new year the Committee on Foreign Investments in the United States (CFIUS) rejected Alibaba Group Holding affiliate Ant Financial’s $1.2b bid to purchase MoneyGram International, a Dallas-based money transfer company. With the deal derailed after a year of negotiations, Ant must now pay a $30m termination fee.

One week later, on January 9, Chinese telecom company Huawei announced that plans to sell its smartphones with AT&T in the United States had also collapsed. After lobbying the CFIUS to scrap the deal, US lawmakers urged AT&T, the second largest wireless carrier, to cut all ties with Huawei, warning that if they or other American firms do business with Huawei, they might find US government contracts awarded elsewhere.

In a signal of cooperation with American regulators, the Chinese Ministry of Industry and Information Technology reprimanded Alibaba and two other top Chinese tech firms for “inadequate” policies relating to personal information protection, calling for an investigation and vowing that any violations would be “severely punished.”  Alibaba’s Alipay was singled out by Chinese cyber regulators over user complaints of automatic enrollment in the company’s credit rating program, which gives Alipay access to a wide array of user data.

It remains to be seen how this chilling effect on Chinese investment will impact the long-anticipated sale of Virginia-based insurer Genworth Financial. The $2.7b acquisition deal with privately held conglomerate China Oceanwide Holdings Group — which acquired the American tech publishing pioneer, data analysis and venture capital firm International Data Group last year— has been stalled repeatedly, by lawsuits and by CFIUS concerns over protection of customers’ personal medical and financial data. The sale, now postponed until April 1, would help Genworth cope with $600 million in debt maturing in May of this year.

Analysis

Acquisitions of U.S.companies by Chinese investors face greater suspicion and scrutiny under the Trump administration, in an atmosphere of increased tensions between the two nations, especially over North Korea’s nuclear program.

But concerns over Chinese policy of requiring firms to hand over key technologies in order to gain access to Chinese markets, corporate espionage, and the Chinese government’s failure to crack down on intellectual property theft, are nothing new.

What’s new is an unprecedented global buying spree on the part of Chinese investors. As a condition of acceptance into the World Trade Organizaition (WTO) in 2001, China agreed to a number of economic reforms that would open its markets to outside competition. Its economy progressed at an impressive pace, as American companies bought up cheap wholesale Chinese products and raced for market position in what has become the 2nd largest economy in the world. China invested roughly $64 billion in the US between 1990 and 2015. But with the release of its Made in China 2025 plan in 2015 — a blueprint for upgrading the country’s manufacturing sector which is seen by many as a “return to old-school top-down mercantilist practices and import-substitution policies” — China’s US-investments surged to $45.6 billion in 2016 alone, with California tech, entertainment, real estate and logistics being the largest recipients at a combined total of $16b.

In spite of Washington’s concerns over technology transfer that may have military applications, such as AI and robotics, and dismay over personal data protections, censorship laws, and a burgeoning surveillance state, Silicon Valley has continued to court China for market growth and partnerships. Chinese investors are giving start-ups more favorable terms, while tech firms argue that engagement is better than withdrawal if America is to stay competitive in emerging markets and innovation.

Signaling a new hard-line approach during Trump’s state visit to Beijing last November, Washington lawmakers introduced a bill to revamp the CFIUS to close gaps in its review process against  “weaponizing” investment by “potential adversaries, such as China.” Although reform of the committee is long overdue, backlog and delays are in part a result of Trump’s inability to fill mid-level political positions in key agencies comprising the CFIUS.

While national security and the notion of reciprocity deserve our attention, Washington’s bellicose tone, punctuated by Trump’s incendiary rhetoric and erratic tweets about both China and North Korea, sabotage diplomatic efforts in an already complicated and sensitive relationship with China. As Trump blusters to gratify a xenophobic and intolerant segment of his “base” and to push his America First agenda forward, the rest of the world seems poised to look elsewhere for leadership.

Engagement Resources

  • US-China Policy Foundation provides opportunities for students, researchers, and practitioners of foreign policy to interact in diverse and substantial ways to promote greater understanding and awareness of issues in US-China relations.
  • The Paul Tsai China Center is dedicated to helping advance China’s legal reform, improving US-China relations, and increasing understanding of China in the United States.

This brief was compiled by Jennifer Chesworth. If you have comments or want to add the name of your organization to this brief please contact jennifer@usresistnews.org.


 

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