Chinese investment in the United States plummeted in 2017 and is likely to continue to fall. According to the Wall Street Journal, Chinese foreign direct investment in the United States declined 36% last year, from $46.2 billion in 2016 to $29.4 billion in 2017. We expect the 2018 figures to be even lower. What could explain the precipitous decline?
Well, haven’t you heard? We’re building a wall.
The United States Government is frantically throwing up barriers to foreign investment, particularly from China. The result of that effort is clear in the swooning Chinese investment numbers. It appears that trend of tightening our defenses will only continue through 2018 and beyond.
CFIUS and Chinese Investment
Under U.S. law, the Committee on Foreign Investment in the United States (CFIUS) has the power to review any transaction that may result in a non-U.S. person taking control of a U.S. business. Any transaction that CFIUS determines poses a threat to U.S. national security or critical infrastructure may be blocked by the President. In practice deals involving a Chinese buyer typically draw the heaviest CFIUS scrutiny. That practice did not start in 2017, but it is gaining steam, and the results are evident in the massive decline in Chinese investment.
One way CFIUS is limiting Chinese investment has been to expand the subject matter of deals it reviews. In the proposed acquisition of MoneyGram by Ant Financial (which we reported on here), CFIUS stretched its definition “critical infrastructure” to cover the personal data of U.S. persons. That may be a reasonable expansion of the CFIUS mandate, but it would also be reasonable to assume that the fact that Ant Financial is a Chinese entity played some part in that decision.
Another focus of CFIUS has been protecting U.S. competitiveness in the telecommunications sector. Thus, when the President himself stepped in to block the Broadcom/Qualcomm merger, (reported on here), the move was based at least in part on keeping the United States competitive in the race with China toward a 5G telecommunications standard.
FIRRMA in the Present and Future
The Foreign Investment Risk Review Modernization Act, or FIRRMA (reported on here and here) is currently in committee in the House, but appears to have the support of the White House and the Departments of Defense, Treasury, and Commerce. The fact that John Cornyn (R-Texas) and Diane Feinstein (D-Calif) – whom we may as well list as representing “Night” and “Day” – are co-writing editorials in support of the act, indicates that the law has bipartisan appeal among lawmakers.
FIRRMA would have three broad effects: expand the jurisdiction of CFIUS to new sectors and new types of investments; target investment from “countries of special concern” (and you may guess from the title of this article what country we expect will be on that list); and increase the Committee’s authority to suspend transactions and implement mitigation measures.
Investing in 2019
In addition to the trends discussed above, when the President requested that his U.S. Trade Representative recommend special tariffs against Chinese imports, (discussed here), he also requested that the USTR provide recommendations on additional investment restrictions that could be implemented against China.
According to some reports (here and here), the Administration is considering invoking the International Emergency Economic Powers Act (IEEPA) to further curb Chinese investment in areas of critical U.S. technology. Sanctions issued under IEEPA could dramatically expand the range of transactions subject to restrictions, and could impose penalties far greater than anything currently done by CFIUS or contemplated by FIRRMA.
The USTR’s proposals for investment restrictions are due on May 21. We will, of course, provide an update here.
If CFIUS continues its hard look at Chinese investment, if (when?) FIRRMA passes Congress in its fall session and the President signs it, and if the U.S. Treasury uses its broad IEEPA powers to impose sanctions against Chinese investments, foreign direct investment from China into the United States may look very different next year than it did in 2016.
It may look like facing the outside of a very high wall.
*Julien Blanquart is an intern at Sheppard Mullin.
 We also note that the decline is due in part to China’s own controls on capital, but that will have to be the subject of another article.