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CHINESE INVESTMENTS BRING DOLLARS AND UNEASE The Chinese would love to use their U.S. dollars to invest in America — if we let them. BY ROLAND FLAMINI
J
ust as world leaders were checking out of the Waldorf Astoria early in October following the annual gabfest officially known as the opening of the United Nations General Assembly, Hilton Worldwide Holdings announced that it had sold its iconic hotel in midtown Manhattan to the Chinese insurance group Anbang for $1.95 billion. Rumors of the sale had been circulating for days, and more than one foreign head of state or government probably went home wondering whether the Chinese would have bugs in place in their favorite suite before next year’s U.N. session. The acquisition raised awkward questions for the U.S. government inasmuch as a sumptuous suite at the Waldorf Towers had been the official residence for successive American ambassadors to the U.N. for about 50 years. An embassy spokesman told Reuters that whether that address remained appropriate depended on what he called “security considerations.” But apart from the uncertainty surrounding the future sleeping arrangements of Samantha Power, the current U.S. permanent representative at the U.N., the Anbang deal also captured headlines as a landmark in the growing wave of Chinese acquisitions in the United States which last year topped $14 billion, double the previous year. Chinese companies are relative newcomers in the foreign investment field and they have a long way to go to match British or French investment levels in the United States; but, swimming in dollars, they are now making up for lost time. In 2013, Chinese enterprises concluded 87 deals: 44 of them were acquisitions and 38 so-called “greenfield” investments, which involve setting up their own industrial plants. Food, energy, real estate and entertainment are among the main targets. This summer, a good many of the hot dogs sizzling in backyard cookouts across America came from a Chinese firm. Why? Because Smithfield Foods Inc. of Virginia, the world’s largest pork producer,
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AMC Entertainment’s 5,000-plus movie theater chain is now Chinese-owned. (Courtesy Wikimedia/Andreas Praefcke)
was acquired in 2013 by Shuanghui (its biggest counterpart in China) for $4.7 billion, thus turning a quintessential company into a Chinese subsidiary. It’s also likely that your cinema seat is Chinese-owned following the acquisition of AMC Entertainment’s 5,048 movie screens in the United States by the Wanda Group for $2.6 billion.Wanda’s colorful chairman,Wang Jianlin, is mainland China’s richest individual with a personal fortune of more than $13 billion. As Chinese acquisitions have increased, so has the concern among U.S. lawmakers over Beijing’s intentions, and Congress has pushed for more scrutiny, especially in deals that transfer American high-tech to Chinese hands, or that appear to have implications for America’s security or America’s interests. Lawmakers are paying more attention to the work of the Committee on Foreign Investment in the United States, or CFIUS, a somewhat shadowy multi-agency U.S. government committee charged with screening potential foreign buyers of U.S. assets.
CFIUS operates out of the U.S. Treasury Department and is chaired by the secretary of the treasury, but that’s just for starters. CFIUS brings together the heads of 15 executive agencies, including the secretaries of homeland security, justice, commerce, defense and state, together with the U.S. trade representative, the director of national intelligence, plus the heads of a number of consultative agencies. Potential foreign buyers submit their purchases to CFIUS for clearance on a voluntary basis if they — or their lawyers — believe their acquisition could be considered a “covered transaction,” which basically means that the American company in their sights belongs to an ever lengthening category of “sensitive” business sectors, especially since the 9/11 terrorist attack. The focus of attention includes companies with anything but the most innocuous government contracts, businesses with security connections or linked to critical infrastructure, research and development, high-tech, and even located near a U.S. government facility. All CFIUS dealings are confidential and
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committee decisions give nothing away. “There is an opaqueness in its decisions,” says Giovanna Cinelli, a lawyer at the Washington law firm Jones Day who has had frequent dealings with CFIUS. Because CFIUS does not divulge its reasons for rejecting or approving an application, “there are no case histories,” Cinelli says. At hearings, however, she finds the committee members “reasonable” and “their questions are pointed and relevant.” Scott Flicker, of the international law firm Paul Hastings, another lawyer who has dealt extensively with CFIUS, adds, “CFIUS is not intended to be a black box, but it’s designed to preserve the confidentiality of the transactions.” The committee’s mandatory, if cryptic annual report to Congress, which consists of little more than numbers, with no names mentioned, reflects the recent increase in CFIUS activity which happens to coincide with the step-up in Chinese investments: For the first time in 2012 (the latest report available, believe it or not) more investors from China (23 out of a total of 114) underwent a CFIUS review than investors from any other country. “The escalation rate for Chinese reviews is as rapid as those of us practicing in the field have guessed,” said a report by the Rhodium Group, a research group that closely follows Chinese investments. What this means is that Chinese investors are not just increasing in numbers but increasingly targeting what the United States government views as sensitive industries. But also in 2012, according to the CFIUS report, 22 foreign companies withdrew their submissions before completion of the screening process (which could take more than two months), usually because they see rejection looming on the horizon and want to avoid the embarrassment of being officially turned down — and there is a wide assumption in legal circles that several were Chinese. For example, China’s huge state-controlled corporations draw suspicion that their investments may have a political purpose. “Because the U.S. views China with caution, Chinese deals will draw scrutiny,” Flicker says. “So much attention is focused on Chinesebased deals that very few go through without comment in the U.S. Congress.” So much so that some investors have
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New York’s Waldorf Astoria, one of the nation’s most iconic hotels, was recently purchesed by Chinese interests for $1.95 billion. (Courtesy Wikimedia/James G. Howes)
taken to consulting members of Congress prior to embarking on the CFIUS process to keep lawmakers in the loop and hopefully cooperative, or at least not publicly in opposition. To some lawyers that seems outside the scope of the screening process, and they don’t do it. Cinelli doesn’t approach lawmakers in advance because she says, “it’s an executive process, not a political process.” But Fricker, who was the lawyer on the Shuanghui takeover of Smithfield, regrets not informing the Hill, which could have avoided a storm of congressional criticism. “There is a purpose behind getting to certain members before they take a public position,” Fricker explains. “If I had had a chance to say, ‘you might initially think the deal is a danger to the U.S. food supply because America would be importing pigs from China, but we have an oversupply in the U.S., and there’s a demand in China,’ I wouldn’t have had to do all that damage control after the announcement.” China complains that CFIUS, under political pressure, applies tougher standards against Chinese investors. Most experts say any foreign company with strong ties to that country’s government will receive extra scrutiny. For example, a House Intelligence Committee report called for a ban on investments by Huawei and ZTE, China’s main telecom network equipment manufacturers, as security risks because both were said to have ties to the Beijing government. “China has the means, opportunity and motive to use telecommunications companies for malicious purposes,” the report stated. (But in its 2013 annual report to Congress, CFIUS said
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the committee, quoting intelligence sources, had no reason to believe any of the foreign investors who had applied for clearance were spying.) Huawei’s “so-there” response was that the company was no longer interested in investing in the United States anyway. Application to CFIUS may be voluntary, but the case of the Chinese machinery company, the Ralls Corporation, was an object lesson in what can happen if a foreign exporter ignores the committee. Having acquired a wind farm in Oregon without consultation, Ralls was later forced to appear before CFIUS because the deal had security implications: The wind farm was located in close proximity of a U.S. Navy training facility that, among other functions, tested drones. On the advice of CFIUS, President Obama in 2013 ordered Ralls to divest itself of the wind farm. It was the first time in 22 years a president had exercised trhe authority CFIUS gives him to block a transaction on security grounds. Ralls appealed the decision: a Washington appeals court ruled that the company’s constitutional rights had not been respected, and ordered CFIUS to provide unclassified information to support its decision and give Ralls the opportunity to submit a defense. The president’s decision is not subject to review, and a reversal of the CFIUS decision appears to experts extremely unlikely. Moreover, to comply with the presidential order, Ralls is said to have sold the wind farm it had bought for $6 million for the knockdown price of $50,000. The new owner was a Chinese-American and therefore not subject to the CFIUS process.
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