Chinese FDI Grew in 2020, but Firms Still Face Uncertainty, Experts Say

Despite more scrutiny from the U.S., Chinese foreign direct investment in North America grew by almost half in 2020 compared to 2019, according to an April 19 Baker McKenzie report. But trade and investment experts cautioned industry about placing too much stock in those numbers, saying two-way U.S.-China investment remains “very low” and Chinese firms are still wary about gaining approval from the Committee on Foreign Investment in the U.S.

Thilo Hanemann, a partner and researcher at the Rhodium Group, stressed that Chinese foreign direct investment in the U.S. and Canada is still much lower than “what we would expect from a healthy” relationship between the world’s largest economies. But he said that doesn’t mean spikes in investment -- such as the 40% increase in Chinese foreign direct investment from 2019 to 2020, according to the report -- can’t occur.

“I think it just reminds us that political rhetoric is not always necessarily that good a reflection of actual deal appetite,” Hanemann said during an April 19 event hosted by the Atlantic Council. “It reminds us that investors are sometimes able and quick to adapt to new regulatory challenges or political situations.”

Although foreign direct investment came to a “halt” in the second quarter of 2020 due to the pandemic, it resumed toward the second half of the year and has since increased, said Rod Hunter, a Baker McKenzie trade lawyer and National Security Council official. “The velocity of transactions picked up,” he said during the event.

Hunter also said investors gained clarity about new CFIUS authorities last year as opposed to the uncertainty of prior years, when the Foreign Investment Risk Review Modernization Act was still being crafted and there were questions about the future scope of CFIUS’s jurisdiction. “There's greater clarity about where the regulatory authorities will intervene,” Hunter said. “That makes it a lot easier for advisors to advise and investors to invest.”

Even though U.S. companies may have a greater understanding of CFIUS’s reach, Chinese firms are still facing intense investment scrutiny and aren’t necessarily optimistic about the future of U.S.-China relations, Hanemann said. In just about three months, the Biden administration has imposed trade restrictions and sanctions on China for trade and human rights violations [see Ref:2103170027] and 2104080011), and lawyers expect CFIUS to maintain its focus on China (see 2101220034).

“We've gotten to a point where some of these Chinese companies that would be in a position to make those big capital-intensive investments are simply uncertain about their long term prospects and the U.S. market, given the volatility of the political relationship in the past couple of years,” Hanemann said.

Those tensions are likely to continue. Lawmakers recently proposed the Strategic Competition Act of 2021 (see 2104080066 and 2104150026), which would increase scrutiny even further on Chinese investments by allowing CFIUS to review transactions involving foreign gifts to U.S. universities. The bill, which includes sanctions and export control measures, would also create a pilot program to oversee the expanded CFIUS jurisdiction until permanent regulations are implemented

The bill would give CFIUS authority to review transactions involving gifts valued at more than $1 million and if they relate to the research, development or production of critical technologies. CFIUS would also be permitted to review a “restricted or conditional gift” that “establishes control” or that provides the foreign person “potential access to any material nonpublic technical information,” according to the bill.

Parties involved in those types of transactions would be required to submit a short-form declaration to CFIUS, and the legislation would add the Secretary of Education to the committee’s interagency membership, Arent Fox said April 16. The firm said the changes are most noteworthy because they would expand CFIUS’s jurisdiction to transactions that “are not actually investments,” an issue that may lead to disagreements between Congress and the White House. CFIUS is still tweaking regulations and providing guidance to industry about its new jurisdiction under the FIRRMA (see 2104160004).

The bill would also update CFIUS’s reporting mandate on critical technologies to include more information on whether foreign governments are trying to obtain research or other information on critical technologies from U.S. universities, Arent Fox said. The legislation, which is expected to be considered by the Senate Foreign Relations Committee April 21, comes amid growing concern from lawmakers about Chinese attempts to acquire U.S. critical technologies (see 2103030057 and 2104160006).