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Year of the Rabbit May Bring More U.S. Opportunities for Chinese Investors

01-28 16:51 Caijing

Fortunately for Chinese investors, 2011 is not an election year and thus the political wildcard is less likely to come into play.

By John B. Bellinger III

The Obama Administration’s rejection of several high profile investments by Chinese companies in U.S. businesses has resulted in complaints from the Chinese government and led many Chinese companies to question whether the U.S. is open to Chinese investment.  During the last twelve months, the Committee on Foreign Investment in the United States (“CFIUS”) -- the  U.S. Government committee that reviews investments by foreign companies that may affect U.S. national security -- reportedly blocked investments by Northwest Non-Ferrous International in Firstgold, a U.S. mining company, and by Tangshan Caofeidian Investment Corporation in Emcore, a U.S. manufacturer of fiber optic equipment.  

Although Chinese investment in some U.S. companies or sectors can be complicated, the fact that CFIUS approved other sizeable Chinese transactions in 2010 demonstrates that the door to Chinese investment in the U.S. is not closed.  Indeed, 2011 may be an auspicious year for Chinese investors interested in the U.S. market, especially because President Hu’s visit to Washington last week appears to have smoothed over some of the political and economic tensions of the previous year.

In 2010, the CFIUS approved at least four important Chinese investments, according to press reports.  In November, CFIUS permitted the China National Offshore Oil Company (CNOOC) to buy 33 percent of Chesapeake Energy’s Eagle Ford shale project in Texas.  Earlier in the year, CFIUS approved China Investment Corporation’s purchase of 15 percent of Virginia-based AES, a developer of power projects; an investment by BGP, a major Chinese geophysical services company  in a Texas-based seismic equipment manufacturer; and the acquisition by the U.S. company TTM Technologies of a Chinese printed circuit board manufacturer which resulted in a significant minority equity interest in the U.S. company.

Here are three tips for Chinese companies interested in making U.S. investments that may raise national security concerns.

First, start small.  It is advisable to establish a foothold in the U.S. market by starting with a small investment, rather than trying to acquire a large company or business.  This might mean buying a smaller company or part of a business that doesn’t present as many national security concerns to lay the groundwork for bigger deals in the future. 

But “small” doesn’t always mean low dollar value.  CIC’s deal with AES was reportedly worth $1.58 billion, but it was still “small” in that CIC only purchased a 15 percent minority interest.  Similarly, CNOOC’s deal with Chesapeake Energy was valued at $2.16 billion, but CNOOC’s relatively small stake left the U.S. company in control.  By contrast, CNOOC’s reported bid to buy all of Unocal in 2005 failed because of political opposition to Chinese acquisition of a major U.S. oil company. 

Second, remember that some U.S. targets are more sensitive than others.  CFIUS is more likely to approve Chinese investments where the target company is less vulnerable from a national security perspective.  Although the U.S. government takes a broad view of what implicates “national security,” the government sees some sectors as having a more direct impact on national security than others.  For example, Chinese companies may have more success with investments in companies that produce green energy or equipment related to extraction of natural resources than telecommunications companies or firms in the defense industry that perform classified government contracts. 

Some deals may also be less controversial when the acquisition is aligned with Administration policy (e.g., the CNOOC deal furthered the U.S.-China Shale Gas Resource Initiative), whereas a sector that is not generally high risk, such as natural resources, can sometimes raise unique national security concerns (e.g., if the transaction involves rare Earth metals or resources near military installations as in the failed Firstgold deal).

Third, understand the political dimension.  Historically, the Executive Branch’s management of CFIUS reviews has been neutral and free from political influence.  President Obama has not taken a noticeably harder or softer line than President Bush on investment by Chinese companies in areas that affect national security.  In both administrations, career officials have conducted thorough and independent reviews that have generally not been strongly influenced by political appointees. After his meeting with President Obama last week, President Hu said he believed that the Obama Administration “will provide a level playing field for Chinese companies to make investments” in the United States.

Although the Executive Branch may welcome Chinese investment, the same may not true be for Congress and the media, who can kill a foreign investment as they did in the 2006 Dubai Ports World deal.  During the 2010 election year, Republican members of Congress asked the CFIUS to block potential investments by Huawei and the Anshan Iron & Steel Group. 

Fortunately for Chinese investors, 2011 is not an election year and thus the political wildcard is less likely to come into play.  That said, Republicans, who recently took control of the House of Representatives, may be more skeptical about Chinese investment, and protectionism driven by the recession may lead other members to oppose deals that threaten U.S. jobs.

The Chinese Year of the Rabbit has the potential to be an auspicious year for Chinese investment in the United States.  If Chinese companies choose their investments cautiously and take account of political considerations when planning transactions that may affect the U.S. national security, they can dispel the myth that such deals aren’t achievable.

Mr. Bellinger is a partner in the law firm of Arnold & Porter in Washington, DC and an Adjunct Senior Fellow in International and National Security Law at the Council on Foreign Relations.  He served as the Legal Adviser for the U.S. Department of State from 2005-2009 and the Legal Adviser for the National Security Council at the White House from 2001-2005.

Full article in Chinese: http://magazine.caijing.com.cn/2011-01-27/110629636.html

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