Bottom line: China is likely to lead the list of countries getting national security reviews for its US purchases over the next few years, reflecting Chinese companies’ growing pursuit of foreign technology and other sensitive expertise.
The past year has been notable for a growing number of Chinese acquisitions in the US attracting national security reviews, and now a new report from the reviewing agency is providing some big-picture numbers about the trend. The headline figure from the new report by the US Treasury Department shows that it reviewed 24 proposed acquisitions of US firms by Chinese buyers in 2014, making China the biggest recipient of such reviews.
At the same time, the report also cast a spotlight on several other trends, including the spread of reviews outside the sensitive high-tech sector and into less conventional areas like real estate. One such deal surprised many last year, when the purchase of the storied Waldorf-Astoria hotel in New York to Chinese insurer Anbang for nearly $2 billion was subject to such a review.
The actual reviewer of these deals is the Committee on Foreign Investment in the US, or CFIUS, which is housed within the Treasury Department. One of my contacts, Anne Salladin, has a better understanding of the process through a former job with ties to the agency, and helped me to interpret some of the contents of the latest report.
Many observers were obliquely critical of the broader security review process, calling it relatively opaque and lacking on any commentary or even acknowledgement when deals are reviewed or vetoed. I’ve also called for more transparency in the national security review process, which usually results in a recommendation that the US president most often follows but on rare occasions will veto.
The nationals security issue has gained growing importance in Sino-US trade relations in the last few years for a number of reasons. Chief among those is the growing muscle of Chinese firms, which have access to big cash and have shown a growing desire to spend it on foreign technology. Revelations in the Edward Snowden cyber spying case of 2013 have also made both Washington and Beijing more sensitive about cross-border trade in sophisticated technology.
All that said, let’s take a closer look at some of the figures from the latest Treasury Department report and try to figure out what they mean and might say about the future. We should start by pointing out the new report is a summary for 2014 and not last year, meaning the information is a bit old. Still, it seems worth reviewing for the broader trends that it reveals.
The department said it received applications for 147 cross-border deals in 2014, and that it actually reviewed 51 of those. (Report; English article) The figure was the largest since 2009, when deal volume slowed sharply in the aftermath of the global financial crisis. China led the field for the third year in a row with 24 of its investments filed for review by CFIUS, followed by 21 from Britain and 15 from Canada.
More Asian Buyers
Salladin noted that South Korea and Singapore also saw significant jumps in filings, indicating that Asian companies are becoming bigger acquirers in a field that was traditionally dominated by European buyers. The report also notes that 11 proposed deals were withdrawn after originally filing with CFIUS, though it doesn’t state what countries those deals came from.
The headlines have been filled these last few months with Chinese plans to buy US firms that are drawing scrutiny for national security concerns. Last year leading US memory chip maker Micron (Nasdaq: MU) abandoned talks to be acquired by China’s Tsinghua Unigroup over such concerns, and just last week Fairchild Semiconductor (Nasdaq: FCS) abandoned similar talks to be bought by a unit of conglomerate China Resources. (previous post)
Another notable development saw US lawmakers express concerns last week about a Chinese plan to purchase the Chicago Stock Exchange, indicating that reviews could extend into financial sector acquisitions. (previous post) Consensus seems to be that China will probably continue to lead the list for the next few years, and it’s quite possible we could see a growing number of CFIUS vetoes as Chinese buyers venture deeper into sensitive areas like high-tech chips, financial markets and trophy real estate.
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