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US plans to scrutinize investments in China

R.report to the police American corporate investment in China has acquired the illusory quality of being always imminent and always lagging behind. Over the past few months, a steady beat of discussion on this subject has been going as fast as a drumroll. In March, the US Treasury and Commerce Departments submitted a report on potential regulations. The following month, President Joe Biden’s security adviser, Jake Sullivan, endorsed the policy in a speech. Biden is expected to issue an executive order. U.S. allies are also considering similar regulations. On June 20th, the European Commission announced a vague plan to propose a concept by the end of the year.

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If Mr. Biden’s executive order actually comes out, it will likely focus on investing in three “power-doubling” technologies: advanced semiconductors and artificial intelligence.AI) and quantum computing. The exact changes to prohibitions and notification requirements remain unclear, but the rule will affect only a fraction of the more than $1 trillion in US investments in Chinese companies by the end of 2021. US companies have invested $120 billion in foreign direct investment in China and $62 billion in venture capital, according to data from research firm Rhodium Group.VCs) investment over the last 10 years (see chart).

A geopolitical brake on American capital is not an entirely new idea. Some companies with ties to the Chinese military are off limits to investors and the government. chips The law prohibits companies receiving subsidies from making investments that could benefit China’s semiconductor industry. Proponents argue that foreign investment restrictions are a necessary extension of America’s patchwork of trade restrictions. If export controls prevent Chinese companies from purchasing some dual-use technology, and if foreign investment screening prevents Chinese companies from catching the US companies that manufacture those technologies, then US capital will be restricted. shouldn’t. Authorized to fund technology development in China.

Restricting U.S. global investors is risky. One is to create overly broad rules that restrict the flow of capital and burden investors without justification. Treasury Department official Paul Rosen said in May that the rule would focus on “investment funds with know-how and expertise.” European leaders say the restrictions are necessary to prevent “know-how leakage”. But it’s hard to tell which investments are more likely to leak. Tech giants wishing to expand their advanced computing efforts in China would probably violate this criterion, but it’s not so simple for investment firms and their end investors. A private equity fund may not gain any operational benefit from buying a company, but a smaller fund may buy a company. VCs Investments may involve technical expertise worth protecting.

According to the think-tank Center for Security and Emerging Technologies, between 2015 and 2021, US investors will VCs Divisions of chip makers Intel and Qualcomm participated in the funding round, accounting for 37% of the $110 billion raised by the Chinese company. AI enterprise. U.S. pension funds are beneficiaries of such investments because they seek returns.examination GGV Capital, one of the most aggressive US investors in China AI According to PitchBook data, according to our analysis of public information, six American pension funds and endowments with total assets in excess of $600 billion: ggv Capital funding over the last decade.

Whether such investments pose national security risks is an open question. The same is true of whether Chinese investors can substitute for funding anyway if US investors are restricted. Before asking asset managers and pension funds, which are typically exposed to hundreds of global investment funds, to look for traces of Chinese tech companies in their portfolios, I think the Biden administration should give a firmer answer. Some people

Another danger is mission creep. Under Biden, economic policy and national security policy are becoming increasingly indistinguishable. Last year, the President directed the Committee on Foreign Investment in the United States (CFIUSMore), the U.S. Inbound Investment Watchdog has surged in recent years and called for consideration of broader factors, including supply chain resilience. Scrutinizing foreign investment based on broader criteria of national interest can be difficult. Others, concerned about expanding investment bureaucracy, have suggested applying existing sanctions rules instead.

Biden’s initial policy on foreign investment is expected to be narrower than what could be called a “reversal policy,”CFIUSMoreThere are quite a few hawks outside the White House who imagine foreign investment screening as a tool for industrial policy. In 2021, a bipartisan group of lawmakers introduced a bill that would review a wide range of foreign investments that could affect more than 40% of U.S. investments in China, according to Rhodium Group. The latest version of the bill was released last month. It would set limits on investment not only in high-tech but also in industries such as auto manufacturing and pharmaceuticals, and would give the White House powers to expand the list.

Growing trade restrictions are not confined to US borders. Some attribute Mr. Biden’s executive order’s delay to the difficulty of rallying support for the new rule among allies. group of seven (G.7) The world leaders’ jamboree ended in May with only promises of milk toast on the issue. Few countries globally have restrictions on foreign investment, but the scrutiny of foreign investment is rapidly tightening. Europe is stepping up protection: 18 of them EUhas such rules, covering an increasingly diverse list of “strategic” areas. The Commission’s plans for foreign investment rules threaten to increase bureaucratic complexity.

The scope of the final rule will determine the impact on Western investment in China. US investment is already declining. VCs Exports to China have plummeted by more than 80% from their peak in 2018. China’s business environment is deteriorating, with no signs of recovery in sight.This month’s big American sequoia VCs The company has announced that it will spin off its China operations by 2024. For now, hawkish policymakers can rest assured that China is doing the work for them.

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https://www.economist.com/business/2023/06/22/americas-plan-to-vet-investments-into-china US plans to scrutinize investments in China

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