The US-China deals market has soured as geopolitical tensions embolden Washington to closely scrutinize foreign investors and their ties to Beijing.
The Committee on Foreign Investment in the US has sharpened its focus on China and technology investments, according to several deals attorneys who interact with the inter-agency panel housed in the Treasury Department.
“Almost any touchpoint with China is viewed negatively by CFIUS and others in the national security community,” said Michael Leiter, CFIUS practice leader at Skadden, Arps, Slate, Meagher & Flom.
The shift is a symptom of the fractious relationship between the world’s two largest economies, marked by incidents such as a Chinese fighter jet swerving in front of a US reconnaissance aircraft over the South China Sea on May 26, and a US fighter jet shooting down an alleged Chinese spy balloon off the South Carolina coast in February.
China’s direct investment in the US through mergers and acquisitions fell to a historic low of $6.2 billion in 2022 from $15.6 billion in 2019, according to Ernst and Young.
Staffers at CFIUS, whose mandate is to vet certain foreign investment for national security risks, are making broader information demands of parties than they have in past administrations, according to lawyers working on deals.
CFIUS is “seizing all opportunities to inquire about transactions and what the parties anticipate the merger will bring down the line,” said Renée Latour, a Clifford Chance international trade partner.
Lawyers are advising corporations and other investors on potential roadblocks their ties to China may raise. Some entities with those connections are growing “frustrated,” Latour said.
Sen. Tim Scott, R-SC, told Treasury officials May 31 that foreign direct investment in his state from companies such as BMW AG and Volvo Group is crucial. “There should never be a world” where companies find China to be a better business environment, he said.
“Efforts to advance national security will never succeed if the government undermines the economic security, and economic opportunities, of everyday Americans,” he said at a Senate Banking Committee hearing on national security and China.
CFIUS did not return a request for comment.
But Paul Rosen, a Treasury assistant secretary who oversees CFIUS, said May 31 the inter-agency committee plans to hold parties accountable through the first-ever enforcement and penalty guidelines released in October.
“We will not compromise on national security concerns—even when they force trade-offs with our economic interests,” he told the Senate panel.
‘Awakening of CFIUS’
China’s emergence as a key player in research and development, and new national security laws in China, has led to an “awakening of CFIUS” over the past 10 years, said Elly Rostoum, a Johns Hopkins University lecturer who studies foreign investment in the US.
Congress in 2018 passed a law expanding CFIUS jurisdiction to include things such as non-controlling investments in businesses involved in critical tech, infrastructure or personal data. The Treasury committee’s funding and staffing also spiked because of the law.
Biden in September signed an executive order to emphasize CIFIUS’s role in supply chains, microelectronics and artificial intelligence. The following month, Treasury released the enforcement guidelines.
The Biden administration is also considering a policy that would place restrictions on outbound US investment in certain sensitive technologies in China.
“The fundamental concern is that the Chinese government is playing a zero-sum game by seeking every available avenue—not just for its own benefit—but to the detriment of the US,” said DLA Piper partner Nicholas Klein.
CFIUS has asked China-based ByteDance to sell its shares in TikTok, the popular social media app with 150 million American users, or risk a ban. China-based Borq Technologies in April said it’s divesting ownership of Holu Hou Energy after CFIUS identified security risks from the investment.
CFIUS staff, meanwhile, is closely scrutinizing any China exposure that businesses from US-allied countries have.
“It is difficult to overstate the attention that CFIUS devotes to China-related concerns, even on deals having no Chinese investors whatsoever,” said Brian Egan, a Skadden national security partner.
‘Still Transactions’
But the investment spigot from China in the US has far from dried up.
China-based investment in venture capital funds was on pace to surpass $800 million in 2022, the second-highest level since 2010, according to a September report from the Foundation for Defense of Democracies. CFIUS reforms do not fully address Chinese capital access in the US, the think tank said.
Chinese investors also filed 44 notices of covered transactions in 2021, according to Treasury Department data, the last year for which it is available.
“There are still transactions that are going through,” said Aimen Mir, a former Treasury official who leads Freshfields Bruckhaus Deringer’s CFIUS practice. “The scope is much narrower.”
Compared to five years ago, there are far fewer industries where CFIUS approval is a “realistic possibility,” Egan said.
CFIUS attorneys said they continue to work on deals involving China in areas such as life sciences. While the agency green-lights most deals, they said it is not uncommon for transactions to be abandoned after an inspection.
CFIUS can also require steps such as a third-party monitor in order for deals to go through.
— With reporting by Mahira Dayal
