Reform of the CFIUS amid rising Chinese investment

PAN Yuanyuan1 ZHANG Ming1

(1.Institute of World Economics and Politics, Chinese Academy of Social Sciences)

【Abstract】China’s growing M&A has increased concerns of the US society. The reform of the CFIUS aims to address the failure of the existing review process in dealing with the “threat” of Chinese investment to US national security. The rationale of the CFIUS regulatory reform is consistent. Our analysis of the CFIUS reviews shows that the US Congress is seriously concerned about investment by Chinese enterprises. The latest CFIUS reform in 2018 increased factors to be considered in its national security reviews, widened the jurisdiction of the CFIUS, adjusted its review process, and expanded its regulatory authority. The article concludes that the latest CFIUS reform may mean that the investment environment for Chinese companies has become more unfavorable. It provides some policy recommendations for the Chinese government and enterprises in accordance with the new changes.

【Keywords】 CFIUS; national security; review mechanism; coping strategy;


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    [1]. [1] [^Back]

    [2]. [2] Here include members of the Department of the Treasury, the Department of Justice, the Department of Homeland Security, the Department of Commerce, the Department of Defense, the Department of State, the Department of Energy, the Office of the US Trade Representative, the Office of Science and Technology Policy, the Office of Management and Budget, the Council of Economic Advisers, the National Security Council, the National Economic Council, and the Homeland Security Council, as well as the Director of National Intelligence Agency and the Secretary of Labor. [^Back]

    [3]. [3] Pan, Y. & Tang, J. International Economic Review (国际经济评论), (5): 130–141 (2013). [^Back]

    [4]. [1] Coordinated strategy means that a foreign government and one (or more) foreign company (companies) take an action plan for the purpose of acquiring the US companies with critical technologies. The evidence for demonstrating coordinated strategy includes three aspects. First, foreign entities attempt (or take real actions) to implement mergers and acquisitions of the US companies. Second, there is evidence indicating that foreign governments (or government-controlled enterprises) give orders to acquire those US companies. Third, foreign governments (or government-controlled enterprises) provide targeted, usually overly generous incentives, such as grants, concessional loans and tax incentives. [^Back]

    [5]. [2] The significance of mitigation measures is that companies take specific and verifiable behaviors to slow down or eliminate some of the commercial plans so as to slow down or erode national security concerns. The key work of those plans lies in what trading-caused risks are and how to eliminate them. [^Back]

    [6]. [1] Representative Robert Pittenger also proposed such a bill with high-leveled similarity. [^Back]

    [7]. [1] The BEA data show that in 2017, Chinese exportation to the US reached USD 524 billion, and importation from the US was USD 186.8 billion, a USD 30.3 billion more total export-import volume compared with that of the second-ranked Canada. [^Back]

    [8]. [1] Here include the production that directly meets the needs of national defense; and human resources, products, technology, materials, other supplies and services for national defense. [^Back]

    [9]. [2] Regulations of the three aspects regulation include the compliance of the government of the counterparty with the anti-diffusion control system (including the treaty and the multilateral supply standard), the relationship between the counterparty’s government and the US government, especially the cooperation record of the two sides on counter-terrorism, the potential possibility for military technology transfer, and specific circumstances of export control laws and regulations of home country investment. [^Back]

    [10]. [3] New criteria added include, for example, whether a foreigner owns the US corporate interests or assets through a transaction, whether he has always abided by the US laws and regulations, including laws and regulations related to export, property rights protection, and immigration, and whether he has complied with contracts and agreements with the US entities. [^Back]

    [11]. [1] “Critical technologies” refers to technologies, components, and technical projects which are or probably critical for national security, which includes all “defense clauses” or “defense services” contained in the Ammunition List under the US International Traffic in Arms Regulations, items in the Commerce Control List of the Export Administrative Regulations for specific reasons, specific nuclear-related equipment, technology, software, facilities, specialized pharmaceuticals and toxins, and other possible technologies that maintain or enhance the technological advantage of the US over “special attention countries.” [^Back]

    [12]. [2] The US critical infrastructure company is a US company that owns, operates, or primarily provides services to an entity that operates in a critical infrastructure department or sub-sector. [^Back]

    [13]. [3] The US Treasury finds the acquisition between Xising International and Eugene of potential a threat to the national security since the gold mines herein are located at the Relif Valley Mine near Ravlok, Nevada, 80 km away from the Falun Naval Air Station and other military bases. [^Back]

    [14]. [1] This means that if 10% is a “safe harbor” to evade the CFIUS review, the FIRRMA eliminated this safe harbor and proposed other standards. [^Back]

    [15]. [2] Sensitive US companies refer to “critical technology companies” or “critical infrastructure companies” or companies that maintain or collect “sensitive information about US citizens.” [^Back]

    [16]. [3] The new category of transactions includes real estate and “other investments,” but is not applicable for transactions “resulting in the control of US businesses.” [^Back]

    [17]. [4] Declaration is mandatory when a foreigner or foreign government obtains the “substantial interest” of a US company in a direct or indirect way. However, under some conditions, the CFIUS may not require that. The FIRRMA authorizes CFIUS to request such a declaration of certain transactions related to “critical technology.” [^Back]

    [18]. [1] The report includes the overall status of China’s foreign direct investment, and details the amount, NAICS code, category, and government control. The report should also include an analysis of China’s investment model and should include any restrictions on Chinese investment. [^Back]

    [19]. [2] The implication of reciprocity is that only when a US company has the right to invest in a particular industry in a certain country, the CFIUS “equally” approves investors from that country to invest in the same industry in the US. [^Back]

    [20]. [1] The FIRRMA is part of the National Defense Authorization Act (NDAA) FY-2019. The NDAA FY-2019 includes the FIRRMA and the ECRA. The latter one mainly includes five aspects. (1) Provide a permanent legal basis for the Export Control Act (ERA). (2) Review the licensing requirements for arms embargoed countries (e.g. China). For countries that are subject to the US comprehensive arms embargo or the UN arms embargo, such as China and other countries, the ECRA requires the US Department of Commerce, Department of Defense, Secretary of Energy, and Secretary of State to conduct review process of export controls for these countries. The review is not limited to restrictions on military items and end-users, but also includes items on the commercial control list that are currently not subject to license restrictions. (3) Establish mechanisms to identify and control “emerging and fundamental technologies.” (4) Revoke previous restrictions on settlement agreements with ZTE. (5) Change the amount of penalties for violations. [^Back]

    [21]. [2] Here include artificial intelligence (AI), robotics, aviation, and 5G technology. [^Back]

    [22]. [1] In 2016 alone, the US direct investment in China was USD 95.2 billion (BEA data), and with the capital of Hong Kong and other places, the stock of such investment remains large for many years. [^Back]

    [23]. [2] For example, Motorola has actively lobbied the US Congress to grant China’s MFN status. [^Back]

    [24]. [3] The US “Return Initiative” website counts the data of the US companies returning from 2007 to 2015. The largest number of returnees were the US companies that originally set up factories in China, accounting for about 60% of the total returnee companies. [^Back]

This Article


CN: 11-3799/F

Vol , No. 05, Pages 32-48+4

September 2018


Article Outline


  • 1 Inherent logic of previous reforms of the CFIUS
  • 2 Facts of characteristics of the CFIUS review behavior
  • 3 Content and connotations of the 2017 reform of the CFIUS
  • 4 Prospects and countermeasures of China’s direct investment in the US
  • Footnote