New US regulations went into effect on Thursday to expand the review of foreign investments for potential national security risks, effectively making restrictions that curb China's access to technology and critical assets permanent.
The regulations extend the reach of the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee that since 1975 has reviewed the national security implications of foreign investments in US businesses.
Approved in a rare display of bipartisan support in Congress, the revised regulations will now let the US government review any deals involving foreign buyers that take even a "non-controlling" minority stake in a US company if the government finds that critical infrastructure, technology or sensitive personal data are involved. Previously, only deals that involved controlling stakes were reviewed.
The new rules, released by the US Treasury Department, did not mention China as a country of concern. But it is widely believed that the reform, the most significant expansion of the CFIUS jurisdiction in more than 40 years, was intended to curtail the Asian nation's access to advanced technologies and other valuable assets.
The expansion marks the official start of a more stringent reality that cross-border deal makers must face.
"Realistically, it's like quicksand: the more you struggle, the quicker you sink," said John Lash at Control Risks, a consultant group in Washington.
Lash, who heads the firm's national security practice for foreign investments, agreed that tighter regulations were necessary: "The US government is looking to protect our national security, protect free and open trade and protect intellectual properties of American companies."
US President Donald Trump's administration has prioritised national security, amid a distrust of Chinese companies it feels may be security risks. Photo: Reuters alt=US President Donald Trump's administration has prioritised national security, amid a distrust of Chinese companies it feels may be security risks. Photo: Reuters
Chris Griner, head of the national security practice at the law firm Stroock & Stroock & Lavan in Washington, also thinks it is "not unreasonable" to tighten the regulations.
"The government has the concern because they have had issues in the past involving China," he said.
But the new regulations have already helped dampen the investment between the US and China. Chinese foreign direct investment in the US dropped 88 per cent, to US$5.4 billion in 2018 from a peak of US$46.5 billion in 2016, according to data from the Rhodium Group research firm.
The Trump administration's concern that US dominance in technology is being challenged by the ascent of China " now the world's second-largest economy " was partly behind the 18-month trade war that led to the series of containment measures that continue to unfold today.
The Chinese telecommunications giant Huawei Technologies, a leader in next-generation 5G cellular technology, has been restricted from doing business in the US. The Trump administration is also pushing its allies around the globe to ban Huawei from the 5G infrastructure, citing security concerns.
With the new regulations, transactions will have a harder time clearing US regulatory hurdles because of potential ties to the Chinese government.
Last year, Beijing Kunlun Tech was required by the US government to sell the assets of Grindr, a gay-dating app it had owned since 2016; the government contended that information compiled on Grindr could be used to compromise US officials using the app.
US President Donald Trump has also rejected a number of high-profile mergers, including an Alibaba affiliate's proposed US$1.2 billion acquisition of the financial transfer company MoneyGram, citing security threats caused by potential personal data leaks. Alibaba owns the South China Morning Post.
US Treasury Secretary Steven Mnuchin said in January that the new regulations would further strengthen national security and "modernise the investment review process," while helping "maintain our nation's open investment policy by encouraging investment in American businesses and workers, and by providing clarity and certainty regarding the types of transactions that are covered".
Critics, however, say the expanded review powers will hurt cross-border merger deals and advance protectionism.
Financial writer Robert Teitelman said in an article in Barron's last year that the regulation is "a creature from the shadows of the administrative state" that "defines obscurity in the federal government."
He said it "encourages the very practices the administration condemns in China."
The US government blocked the sale of MoneyGram International to Alibaba's digital payment service Ant Financial after the Committee on Foreign Investment in the US (CFIUS) voiced doubts about the security of data of US citizens. Photo: EPA-EFE alt=The US government blocked the sale of MoneyGram International to Alibaba's digital payment service Ant Financial after the Committee on Foreign Investment in the US (CFIUS) voiced doubts about the security of data of US citizens. Photo: EPA-EFE
An earlier version of the revised CFIUS regulations " a pilot programme in effect since late 2018 until now " caused many to worry that the US had gone too far in regulating foreign deals that could hurt the country's economic growth and technological development.
Others said the list of critical and emerging technologies that have now come under CFIUS's authority to review is vague and need more clarification.
In 2018, more than 240 deals went through the CFIUS review, according to a senior CFIUS adviser, who asked not to be named because the data is not publicly available. Officials in January said the number of deals to be reviewed are sure to increase after the new rules kick in.
For American companies dealing with foreign buyers, "it's a net positive", Control Risks' Lash said, contending that the new oversight would help protect their intellectual property rights. He said that even under the pilot programme, he saw more than 90 per cent of the mergers related to foreign buyers go through.
Griner also said that, a tougher CFIUS review notwithstanding, his team continued to see mergers and acquisitions approved.
"The fact is people are already living under the new reality for a while now," he said. "Today is the end of that period. Now we go quietly into the dark."
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