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May, 2018

Congress prepares legislation to restrict Chinese tech investment in US

Original article: The Financial Times

The U.S. Congress is preparing a bill designed to tighten scrutiny of Chinese investment in sensitive American technology. Specifically, the bill would give the Committee on Foreign Investment in the United States (CFIUS) greater oversight over foreign investment, especially from China. With broad bipartisan support, the bill is expected to pass Congress this summer. 

Analysis:

Despite the best efforts of consultants and lobbyists, China's U.S. investments were never going to be as straightforward as its forays into the developing world. There, Beijing can usually surmount opposition. Sometimes a project goes awry, like when the construction of a massive port in the Sri Lankan city of Colombo stalled in 2015. But Sri Lanka asked China to resume work on the port just over a year later. What prompted Sri Lanka's reversal? It had no better options. 


Unlike developing countries, the U.S. doesn't need China's help to build fundamental infrastructure. Yes, a fair bit of U.S. infrastructure is crumbling, but that's different from not having it in the first place. And anyway, it's nothing The Donald can't fix. 


On a more somber note, China is a minor player in the world's largest FDI destination. In 2016, China wasn't even among the top 10 nations investing the most in the U.S. It invested about $58 billion, compared to Spain's $67.2 billion and Singapore's $73.7 billion. The U.K. is the largest foreign investor in America; it pumped $598.3 billion into the U.S. in 2016. 


At the same time, Chinese investment in the U.S. has targeted prime technology assets as Beijing tries to leapfrog its way to global technology dominance. The Chinese leadership seeks ownership of world-leading technology and the ability to set global standards based upon it. And it wants technology independence. For the Chinese leadership, the ban on U.S. firms doing business with ZTE has served as an important reminder that China needs its own "red supply chains." 


That brings us to the legislation itself. The most important provisions in the bill would give CFIUS stronger oversight of foreign investors taking minority stakes in small startups and require the Trump administration to create a list of emerging technologies to safeguard with export controls. The legislation would heighten regulators' awareness of problematic deals that might otherwise fly under their radar.


It's one thing for a state-backed Chinese juggernaut like Tsinghua Unigroup to bid for Micron (it happened in July 2015), one of the U.S's premier semiconductor firms. CFIUS would never have signed off on that deal. But a six-month investigation by Politico published in a May report found that CFIUS has failed to adequately scrutinize Chinese investment in U.S. tech startups. Further, Politico found that the CFIUS review process for the acquisition by foreign investors of distressed U.S. assets, such as a firm undergoing bankruptcy, is insufficient. Last year, Avatar Integrated Systems, a company with possible links to the Chinese state, purchased the bankrupt U.S. semiconductor maker ATop Tech without a formal CFIUS review. ATop Tech had a $US1 billion share of the integrated circuit and electronic-design automation markets, the Politico report said. 


Most opposition to the bill comes from Silicon Valley, where some tech heavyweights lament the prospect of additional regulation. Restricting foreign investment in early-stage startups would cause the U.S. to lose its preeminent position in the global tech economy, Chris Nicholson, an executive at an artificial intelligence startup, told Politico. 


Robert Atkinson, head of the Washington, DC-based Information Technology and Innovation Foundation, sees the situation differently. Congress has made the point that what's good for Silicon Valley may pose national-security risks. But Atkinson believes the business risks are equally serious. He told The Financial Times last week that U.S. tech firms may be giving away the store to Chinese investors.“They buy up the company and suck out the technology," he said. 

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