Bounding Investment In China: Constraints and Complications
The United States (US) has been striving for some time to hinder China’s acquisition of technology-related hardware, software, and intellectual property (IP) through export controls, limits on Chinese investment in American high-tech firms, and even investigations of researchers tied to Chinese universities and think tanks. The goal ostensibly is to prevent Beijing from acquiring technology that would bolster China’s military capabilities. For those more cynical, Washington is attempting to undercut China economically and, in turn, contain China or prevent its rise. Whatever the case, Washington moved in March this year to increase pressure on China by beginning the process of instituting a review system for investment going to China. This seems a natural extension of where the US has been headed and, no doubt, has something to do with a Congress that is hostile to most forms of cooperation with China including investment. It is unclear, however, if the system will be workable, what are its implications for business, and how consequential it will be for China. This piece offers thoughts on the first two issues.
There has been displeasure with American investment in China for a long time with critics charging, among other things, that it has deindustrialized the US, cost American workers jobs, aided China’s rise, contributed to human rights abuses, and supported the Chinese Communist Party. It is only after the intensification of the Sino-American Cold War in technology, however, that the US government began working seriously on instituting a formal system—a reverse Committee on Foreign Investment in the United States (CFIUS), as some have termed it—for controlling American investment flowing into China. To be clear, the US already curbs technology investment entering China as evidenced by restrictions on companies using CHIPS Act semiconductor subsidies to expand production in China. There is, though, no formal review process for outbound investment generically speaking. Despite reports that the Joseph Biden administration would put forth a proposal for an outbound investment review system in February or March, nothing has yet emerged. This is hardly surprisingly given the complexity of such a mechanism and all the interest groups attempting to shape it to their tastes. According to the latest publicly available information, the mechanism the administration will advance will focus on a narrow set of areas such as artificial intelligence, biotechnology, quantum computing, and semiconductors.
Implementing the system will be immensely complicated. Aside from selecting the sectors that will be targeted, the US government has to decide which investors will be regulated. This will be a formidable task given the hundreds, if not thousands, of “American” companies, hedge funds, venture capital firms, pension funds, private equity firms, and investment banks, some with operations outside the US, involved in deals in China or with Chinese “partners.” Washington also has to determine what it means to invest in China given the presence of Chinese companies in the US, Chinese investments in firms in foreign countries, Chinese stock offerings, “American” firms having all kinds of financial links, direct and indirect, with operations in China, and investment by Chinese nationals in firms in the US. It further needs to decide how to handle investments that might be routed through third parties, nefarious and not. As well, it has to determine what the system will require beyond reporting. For instance, it needs to be decided if certain kinds of investments will be blocked, modified, or something else. These challenges are daunting enough, but the US will have to coordinate with allies and partners such as the European Union (EU), EU member states, Japan, Korea, and the United Kingdom.
In the absence of a clear proposal, it is hard to say definitively what an outward investment review mechanisms’ business implications will be. Moreover, the agencies involved in implementing the system can later modify its implementation while the US Congress can pass legislation toughening or softening the mechanism. This said, it is clear that actors investing in China will face new legal and administrative burdens. It also is likely that this will further poison economic relations between the US and China creating an even more difficult operating environment for American firms. Indeed, some speculate the mechanism may spur Beijing to retaliate in some way. Moreover, American investors focused on targeted sectors may find themselves put at a competitive disadvantage versus investors from other countries or worse completely excluded from attractive investment opportunities. It is quite imaginable, too, that American investors will find it increasingly challenging to cooperate with Chinese partners given the possibility that such cooperation might be deemed “investment.”
Aside from the obvious steps of continually monitoring what is transpiring and working, in a way sensitive to the current security environment which does not support meek responses to China, to shape the administration’s proposal and its implementation, American firms with investment plans clearly need to broaden their investment horizons and identify new pathways for generating the returns (cash, IP, or something else) that they used to generate from “traditional” “investments” in China. They should prepare themselves for the possibility of an adverse Chinese reaction, too, though it remains unclear what form this will take, if any. On top of this, American investors should bolster their legal and regulatory compliance staff. Unfortunately, Boards and top executives need to recognize that the outward investment operating environment may worsen because Sino-American relations are fluid and national security considerations will evolve with technology and political changes in the world.
Image source: Reinhold Möller, CC-BY-SA 4.0
 Ana Swanson and Lauren Hirsch, “US Aims to Curtail Technology Investment in China,” New York Times, February 9, 2023, https://www.nytimes.com/2023/02/09/business/us-china-investing-tech-bide... and Demetri Sevastopulo, “Congress to Examine Operations of US Companies in China,” Financial Times, February 27, 2023.
 One analysis reports that the US first began to give serious consideration to an outward investment review system in 2018 when it was modifying processes for inward foreign investment reviews as well as export control laws and regulations. Various factors prevented forward movement, though proposals were revived in 2022 partly spurred by discussions surrounding the passage of the CHIPS Act. Emily Benson, Francesca Ghiretti, and Daniel Elizalde, “Transatlantic Approaches to Outbound Investment Screening,” CSIS Analysis, January 17, 2023, https://www.csis.org/analysis/transatlantic-approaches-outbound-investme....
 Demetri Sevastopulo, “Chipmakers Receiving US Federal Funds Barred from Expanding in China for 10 Years,” Financial Times, February 28, 2023.
 Swanson and Hirsch, “US Aims to Curtail Technology Investment in China” (February 9, 2023); Daniel Flatley and Erik Wasson, “Biden Closes in on Order to Restrict US Investment in China Tech,” Bloomberg, March 4, 2023, https://www.bloomberg.com/news/articles/2023-03-04/us-curbs-on-china-tec... Jack Stone Truitt, “Biden Executive order on Investment in China Faces Hurdles,” Nikkei Asia, June 10, 2023, https://asia.nikkei.com/Politics/International-relations/US-China-tensio....
 Swanson and Hirsch, “US Aims to Curtail Technology Investment in China” (February 9, 2023); and Martin Chorzempa, “New Rules Curbing US Investment in China Will be Tricky to Implement,” PIIE Blog, May 3, 2023, https://www.piie.com/blogs/realtime-economics/new-rules-curbing-us-inves....
 Chorzempa, “New Rules Curbing US Investment in China Will be Tricky to Implement” (May 3, 2023); and Truitt, “Biden Executive order on Investment in China Faces Hurdles” (June 10, 2023).
 Benson, Ghiretti, and Elizalde, “Transatlantic Approaches to Outbound Investment Screening” (January 17, 2023); Swanson and Hirsch, “US Aims to Curtail Technology Investment in China” (February 9, 2023); and Truitt, “Biden Executive order on Investment in China Faces Hurdles” (June 10, 2023).
 Khushboo Razdan, “US Considers Screening Outbound Investment Amid China Competition, Leading Experts to Urge Caution,” South China Morning Post, May 19, 2023, https://www.scmp.com/news/china/article/3221069/experts-urge-caution-us-....