US panel calls for ban on acquisitions by China state firms

Posted on November 16, 2016

Is it time for a crackdown on Chinese state-owned enterprises buying stakes in US companies? A key policy group thinks so, according to a report released on Wednesday that may provide ammunition to the incoming Republican administration as it eyes a more protectionist stance on global trade.

With the US-China trade deficit reaching its highest level on record last year – $365.7bn, 6.5 per cent higher than a year earlier – the US-China Economic Security Review Commission, which makes policy recommendations to the US government on its trade relationship with China, is recommending that the US stop China’s state-owned enterprises from acquiring or otherwise gaining control of American companies.

Chinese investment in US companies “is rising rapidly and will continue to rise” as China looks beyond its borders to juice up economic growth, the panel wrote in its annual report to Congress.

Tech companies in particular have been favourite takeover targets. For instance, over the past year, Chinese companies made more than 20 attempts to buy all or part of US semiconductor companies like Fairchild Semiconductor and Micron Technology, the report said. That has led to “growing political concerns” over the “inherently high risk” that Chinese state-owned enterprises may leverage the technology, intelligence and market power it gains through those acquisitions “in the service of the Chinese state to the detriment of US national security,” according to the report.

The Committee on Foreign Investment in the United States – an inter-agency panel made up of officials from multiple US agencies, including national security and defence – is authorised to review proposed transactions that may hand control of a US business over to a foreign person to discern its effect on national security interests. Out of more than 100 deals it reviewed in 2014 – the last year for which data are available – 24 involved Chinese companies, the report said.

The panel’s report recommended that US lawmakers authorise the CFIUS “to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies.”

Currently, the CFIUS has the power to review or block such deals, or require the purchaser and target to take steps to mitigate the deal’s effect on US national security. Its powers have made it a wild card in the US government’s already complex M&A review process, particularly for Chinese companies, many of which are government-owned. For instance, its concerns prompted Tsinghua to withdraw its $3.8bn bid for a 15 per cent stake in data storage group Western Digital in March.

The report comes as China’s trade relationship with the US is poised to come under increased scrutiny under the incoming administration of President-elect Donald Trump, who repeatedly blasted the country during his campaign – although his advisers have already taken steps to reassure that a trade war is not in the works.

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