The China Question

www.worldecr.com 18 ThE ChInAquESTIOn CHINA resulted in a ‘really significant decline’ in Chinese investment in the US technology sector. ‘Because of the new FIRRMA mandatory notification rules and some of the adjustments to the other filing requirements, compared to a CFIUS filing, technology transfers are a more straightforward way for Chinese companies to acquire US technology,’ Liu says. ‘ese days, Chinese companies that previously wanted to acquire US technology through acquiring a US technology company now just opt for outright licensed technology transfers,’ he says. Barbara D. Linney, a partner at BakerHostetler in Washington DC, says that CFIUS’s long reach is among the top concerns of Chinese investors. ‘ere is a lot of concern on the Chinese investor side to understand whether a transaction is of a kind that CFIUS would have jurisdiction over, to understand whether the filing might be mandatory, and then to understand the likelihood that CFIUS would come back and review the transaction, even if the parties didn’t file a voluntary notice,’ she explains. ‘e other thing that Chinese clients are very concerned about is what mitigation requirements might be imposed in the event that CFIUS is prepared to clear a transaction, but with conditions. e types of mitigation measures that could be required are an issue that companies do a lot of thinking about,’ she explains. Linney adds that US tech companies looking for buyers or investors are themselves shying away from Chinese buyers or investors. ‘What I would say is that most sellers would want to steer away from Chinese investors if they have other alternatives, and for the most part they usually do,’ she says. Linney notes that, between CFIUS and the Commerce Department, ‘there’s now a very broad net cast to be able to review transactions’ by foreign investors. She agrees with Roy Liu, saying that a Chinese investor may decide to acquire technology from a US company through a licensing agreement instead of investing in or buying the company in order to avoid CFIUS: ‘at type of transaction could ‘be subject to review by the Commerce Department under the new ICTS review regime,’ she explains. ‘So between them, CFIUS and the Commerce Department are trying to control all the routes that can be used to get US technology into Chinese hands.’ CFIUS on the hunt Brian Egan, a partner at the DC office of Onboarding allies Giovanna M. Cinelli is a partner at law firm Morgan Lewis in Washington, DC and head of the firm’s International Trade and National Security Practice. She says she has seen no slowdown in Chinese investments in US technology companies. ‘I'm seeing Chinese investments continue, and we are actually seeing CFIUS filings being made for Chinese investments across industries. So, from that perspective, we’re not seeing a slowdown,’ she says. ‘We do note a granular focus on proper export classification to make sure the definitions of critical technology are identified adequately so that parties can rely on those classifications to determine whether mandatory CFIUS filings are needed. And then we’re seeing overall a much more refined due diligence process to make sure that any gap or areas of interest for the government can be identified earlier on in the transaction process,’ she explains. ‘We have identified some shifts in the parties that are making those investments and we’re also seeing some phasing in of the investment. So perhaps four years ago we might have seen someone coming in to buy an entire company, for example that’s dealing in advanced technologies. Now, we’re starting to see in some circumstances that the investor is coming in and making only a partial investment,’ she observes. Cinelli notes that the United States is not alone in toughening regulations on Chinese investments, especially in cutting-edge technologies. Washington has been tremendously successful in engaging with allies and partners to implement their own robust foreign direct investment reviews, she adds. Japan has updated its export control and foreign direct investment regime, as has Australia; the European Union has published its framework and set out implementing regulations; the United Kingdom has established a regime and is in the process of full implementation later this year; France, Italy and Germany have either implemented programmes or expanded them; and Russia has put together a foreign direct investment regime that Cinelli says, ‘is as robust as that of the US’. Cinelli says there has been an ‘enormous amount of granular information-sharing’ with US partners and allies, which has likely contributed to the decisions they have taken on watching Chinese investments. The Clean Networks Initiative and the China Initiative, which were introduced under President Trump, were both designed to share information, she explains. ‘They were designed to share information about the risks, where those risks exist and action for managing those risks,’ Cinelli notes. With the United States leading the way, the pressure on China is growing. In mid- June, the G7 group of rich nations agreed on plans to establish an alternative to China’s ‘Belt and Road’ initiative, part of a push against Beijing that also included pressure on human rights, supply chains, support for Taiwan, and demands that China disclose more information about the origins of the Covid pandemic. The Belt and Road initiative is China’s ambitious programme to build physical and digital infrastructure to connect countries from Asia to the Middle East, Africa and Europe. On 14 June, NATO Secretary-General Jens Stoltenberg joined the chorus of criticism on China, when he called on the alliance to respond to China’s economic, political and military rise. ‘China is coming closer to us. We see them in cyber space, we see China in Africa, but we also see China investing heavily in our own critical infrastructure,’ he told reporters at NATO headquarters before the start of a summit in Brussels. ‘We know that China does not share our values ... we need to respond together as an alliance,’ he said, adding that China was not an ‘enemy or an adversary.’