Washington Worry:
China's Appetite for Buying US Companies

Art by Alessandro Gottardo (Shout)

All the attention is on President Donald Trump’s tariff-driven efforts to curb Chinese imports. Less noticed is his bid to stop China’s enterprises from buying US companies that would give Beijing a strategic tech edge.

The protectionist-minded White House is amping up efforts to block China’s gobbling up American corporations, particularly those with superb technology. Since Trump took office, the government’s Committee on Foreign Investment in the United States (CFIUS) has nixed eight buyout offers from Chinese entities. And the administration is eyeing an emergency law, passed for wartime use, that would broaden its powers to limit Chinese firms’ ability to invest in American innovation.

Already, the president has slapped $60 billion in retaliatory tariffs on Chinese imports, which will be named soon. The levies apparently will be imposed mainly on tech-oriented products, ranging from aeronautics to new-energy vehicles. This comes on top of new duties the administration has announced for a range of items, such as on solar panels and aluminum, which applied to many nations but had a special focus on China. As a reprisal, China on Monday slapped new tariffs on an array of goods imported from the US, mainly foods like pork and fruit.

Filching intellectual property happens several ways. American companies that want to do business in China are forced to take on local partners there, and divulge trade secrets. Then there’s outright theft, usually via hacking US corporate computers. But the seemingly friendly approach— when deep-pocketed Chinese corporations offer to pump capital into the US economy and create or save jobs—is perhaps the cleverest.

Chinese investment in the US, the vast bulk of it purchases of companies, has exploded since 2001, when China joined the World Trade Organization, which made doing business elsewhere easier. The peak year for Chinese acquisitions in America was 2016, according to the Rhodium Group. Then Chinese interests bought 178 companies for $46 billion, including HNA’s purchase of technology distributor Ingram Micro ($6 billion), Haier’s buyout of GE Appliances ($5.6 billion), and Apex Technology’s acquisition of imaging outfit Lexmark ($3.6 billion). 

In 2017, though, that pace slackened a bit. The outlay shrank by one-third to $29 billion, for 161 deals, notably the HNA takeover of CIT’s aircraft leasing business for $10.4 billion. That reduction has more to do with the Chinese regime’s cracking down on overseas investments, in a bid to reduce the nation’s massive debt and to ease downward pressure on its currency, the yuan (because more yuan circulating outside China makes its exchange rate less costly).

Most likely, a desire to avoid antagonizing the Trump administration was a factor, too. Trump has labeled China “an economic enemy” and has made it his chief villain for the hollowing out of the US’s manufacturing base, an issue that propelled him to the White House.

Nevertheless, many financial observers in the West who study Chinese relations think the slower acquisition tempo is temporary, a tactical retreat. And indeed, recent Chinese buyouts hardly dialed back to zero. The 2017 deal volume was still the second-highest, behind the year before.

“They’ll be back,” said Crit Thomas, global market strategist at Touchstone Investment. “It’s in their best interest to hold off until 2019.” By then, the 2018 mid-term elections in the US will be over, and perhaps some arrangement will have been struck between Washington and Beijing.

Meanwhile, protectionism is the order of the day for the president. Aside from tariffs, Trump’s biggest weapon has been CFIUS, which wields the mandate to deny offshore bidders from adding US businesses, thus harming national security. The agency employs a wide-ranging definition of national security, and ropes in anything remotely smacking of technology.

In January, for instance, CFIUS squelched the attempt by Ant Financial Services, a subsidiary of Chinese online giant Alibaba, to scoop up Dallas-based MoneyGram, the world’s second-largest money transfer provider. Ant, which operates an online payment system like PayPal’s, would have paid $1.2 billion.

CFIUS reportedly deep-sixed it for fear that Americans’ privacy could be compromised. The real problem, however, was that “Ant wanted MoneyGram’s fin-tech,” meaning financial technology, said Stefan Selig, managing partner at BridgePark Advisors, and a member of CFIUS in the Obama administration.

Of the 10 foreign buyouts that CFIUS has denied in the past 14 months, only two weren’t from China. And one of those, the quest for chipmaker Qualcomm by Singapore’s Broadcom, was made with China in mind. (The other denial, of the LED lighting business Cree, concerned a German company.) The White House’s worry with Qualcomm, news reports said, was that the overseas capture of the chip firm would diminish America’s prowess in the semiconductor competition with China. And this despite Broadcom’s pledge to move its headquarters to the US, probably to San Jose, California.

The other CFIUS turn-downs during Trump’s tenure have been almost all hard-core tech deals—other than Aleris (a strategic metal) and a 20% stake in Cowan (financial services). These were chipmakers Xcerra and Lattice Semiconductor, airline movie and Wi-Fi provider Global Eagle Entertainment, and mobile broadband company Novatel Wireless. HERE, which makes digital maps for autos, is majority-owned by several German corporations as well as the US chip behemoth Intel, which controls 15%.

According to a report in The New York Times, the administration wants to get even better firepower in stopping Chinese investment in corporate America. Its intended vehicle is the 1977 International Emergency Economic Powers Act, which it could invoke to destroy any type of Chinese acquisition, even if it had nothing to do with national security.

These efforts could be Trump’s cudgels to secure better access for American business in fast-growing China. There’s a school of thought that Trump’s threats are merely a ploy to gain an apparent win from the Chinese and please his voter base. “This is right out of the ‘The Art of the Deal,’ and he’ll probably get what he wants on intellectual property,” said John Creswell, executive managing director of Duff & Phelps Investment Management, referring to Trump’s 1987 book, where he talked about bluffing and posturing to secure what he wants.

Still, even if Beijing grants US companies a more welcoming environment in China’s economy and some protections for trade secrets, few doubt that the president is staunch in his belief that US corporations and their technology need a firm defense against future Chinese incursions.

If China is America’s enemy, it is a formidable one. It is the largest exporter, shipping an estimated $2.2 trillion in 2017, states the Central Intelligence Agency’s World Factbook, with the US at No. 3 with $1.6 trillion (the European Union is second at $1.9 trillion). What’s more, China now has the world’s second-largest economy ($11.9 trillion last year), growing at a 6.5% rate, almost three times that of the United States (2017 gross domestic product: $19.3 trillion). Result: No one expects an easy process in a battle of wills between a superpower and a near-superpower.

“This,” said Matt Lloyd, chief investment strategist at Advisors Asset Management, “is going to get contentious.”