China on Tuesday called on the U.S. to review Chinese investments in the country "objectively and fairly," the day after President Donald Trump signed the National Defense Authorization Act of 2019 — the federal defense budget and policy priorities for the upcoming year — and the attached Foreign Investment Risk Review Modernization Act, or FIRRMA.
A spokesperson for China's Ministry of Commerce, or MOFCOM, acknowledged the passage of FIRRMA and said in a statement that the country will "closely follow" the effect the new legislation will have on Chinese companies looking to invest in the U.S.
The spokesperson also called on the U.S. to not unfairly single out Chinese investors.
"The current economic globalization is developing in depth, and cross-border investment is on the rise. Chinese and American companies have a strong will and great potential in deepening investment cooperation," the spokesperson said in the statement.
"The U.S. should treat Chinese investors objectively and fairly, and avoiding national security censorship as an obstacle to investment cooperation between Chinese and American companies," the statement continued.
The text of FIRRMA does not specifically single out China as a potential threat, however, Chinese investment activity in the U.S. was part of the motivation behind the bipartisan effort to update CFIUS.
"FIRRMA is of course not explicitly directed at China," said Mario Mancuso, who leads Kirkland & Ellis LLP's international trade and national security practice. "But ... the context of the legislation is important and straight forward, and that is China."
When the legislation was introduced in both the House and the Senate in November, members of the bipartisan group sponsoring it did not shy away from pointing to certain Chinese investments as an area of concern.
Sen. John Cornyn, R-Texas, a key architect of FIRRMA, at the time said that "potential adversaries, such as China," are "effectively degrading" the U.S. military's technological edge by "exploiting gaps" in the CFIUS process.
Cornyn reiterated his concerns with Chinese investment in the U.S. in a statement Monday, saying that the U.S. "can no longer allow dual-use military technology to be vacuumed up by countries like China."
FIRRMA does still hint at U.S. concerns with Chinese investment, however.
In the text of FIRRMA, it says that CFIUS can consider in its review process "whether a covered transaction involves a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security."
In certain situations, China could fit that description, given its Made in China 2025 campaign. Through the campaign, the Chinese government is supporting Chinese companies' efforts to pick up technology to become a leader in a variety of sectors, such as next-generation technology, aviation and clean energy.
Cornyn also highlighted the Made in China 2025 campaign as an area of potential concern back in June 2017, when he announced that he was readying a bill that would rework the current CFIUS regime.
Even with the changes to CFIUS, however, and with China being a motivating factor behind the move to modernize the interagency committee, the U.S. remains much more open to foreign investment than China itself.
"The U.S. still has one of the most open investment regimes in the world," said Rod Hunter, a Baker McKenzie partner who advises on international trade and investment policy and regulatory matters. "China talking about hoping the U.S. is open, you have to take with a grain of salt."
But ultimately, the changes to CFIUS do not alter how the interagency committee views national security risks. So while CFIUS may be looking at more deals, it does not necessarily follow that fewer deals will be approved.
"It is true that this is going to make it more challenging for some investors, in particular Chinese investors, to invest in things that they may have been able to invest in before, because CFIUS wasn't aware of it. This isn't going to change how CFIUS looks at cases," Hunter said.
"It changes the investment environment, but it doesn't represent U.S. turning war against China," Hunter said.
Chinese investment in the U.S. has already been slowing, due in part to the perception that it is tough to get deals approved by CFIUS.
According to an April report by the Rhodium Group and the National Committee on U.S.-China Relations, closed Chinese investments in the U.S. dropped to $29 billion in 2017 from $46 billion in 2016. The report also indicates that Chinese-backed deals worth an estimated $8 billion were abandoned in 2017 due to CFIUS concerns.
The report also notes that CFIUS is not the only factor to blame for the decrease in activity, as outflows from China were also curbed by shifting Chinese regulations on outbound investments.
Before FIRRMA, CFIUS reviewed transactions that give foreign entities control over or access to a sensitive U.S. asset. With FIRRMA, the definition of control as a term of art shifts more toward influence. CFIUS will have the ability to also review non-control investments by foreign entities in companies that are in the critical infrastructure or critical technology spaces or that hold personal data of U.S. citizens.
The legislation also explicitly opens the door for CFIUS to review other investments that give a foreign person influence over a U.S. entity or access to nonpublic information, such as the right to be on the board, nominate a board member or even just observe the board.
Real estate transactions are also explicitly pulled into reach for CFIUS, including investments and leases in proximity to sensitive government areas. The new legislation also specifically gives CFIUS the ability to review any deals that are structured in a way that aims to circumvent the review process.
Filing for CFIUS will also no longer be a voluntary process, as it has been in the past. With FIRRMA, certain transactions will be required to file with CFIUS. Deals that would spur a mandatory declaratory filing include those that involve a U.S. entity in the areas of critical infrastructure, critical technology and the personal data of U.S. citizens.
The declaratory filing is not a full filing. It's expected to be no more than five pages and would just allow the parties to flag the deal to CFIUS so the committee can determine whether it would need to make a full filing to kick off an initial review period. The idea is that CFIUS will have more visibility into the smaller, less public deals that may have previously flown under the radar.
FIRRMA also extends the timeline for the review process. The initial investigation period is currently 30 days, but would be extended to 45 days. CFIUS would maintain the ability to then launch a 45-day investigation period, with the new ability to extend the investigation by 15 days under certain circumstances.
Some of these changes will be implemented immediately, while others will be fine-tuned and implemented later by CFIUS.
--Editing by Nicole Bleier.
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