U.S.-China Commission Calls for Ban on China's Purchases of U.S. Companies

Commission: Allowing China to buy American firms 'high risk,' would adversely affect national security

A Chinese clerk counts RMB (renminbi) yuan banknotes at a branch of China Construction Bank
A Chinese clerk counts RMB (renminbi) yuan banknotes at a branch of China Construction Bank / AP
October 27, 2016

The U.S.-China Economic and Security Review Commission is calling for a ban of Chinese state-owned enterprises' purchases of U.S. companies, according to the commission's annual report.

"The Commission recommends Congress amend the statute authorizing the Committee on Foreign Investment in the United States to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies," the draft report, labeled final draft, says.

The Committee on Foreign Investment in the United States evaluates the transactions of state-owned enterprises and government entities that result in control of U.S. businesses to determine their effect on national security.

Rep. Robert Pittenger (R., N.C.) said that Congress should tailor the law to combat aggressive Chinese economic actions from state-owned enterprises.

"The Commission is sounding the alarm to a national security threat we cannot ignore, and I strongly support their recommendation," Pittenger said. "China doesn't play by our rules, and we must take necessary steps to adapt our authorities and procedures to their aggressive posture.  This isn't the first time a government agency or committee has cautioned against doing business with Chinese companies that have specific and direct state interests."

"The growing threat from China is why earlier this month I initiated a comprehensive review of the Committee on Foreign Investment in the U.S. process with the help of the Government Accountability Office," the congressman continued. "Our review should help Congress tailor the law to provide the resources and legal authorities necessary to combat aggressive, and sometimes malicious, Chinese economic actions from both state-owned enterprises and the supposed privately-owned enterprises under direct Chinese communist influence."

The commission says that allowing China to obtain U.S. companies is "inherently high risk" and would adversely affect America's national security.

"The Chinese Communist Party continues to use state-owned enterprises as the primary economic tool for advancing and achieving its national security objectives," the report says. "There is therefore an inherently high risk that whenever a state-owned enterprise acquires or gains effective control of a U.S. company, it will use the technology, intelligence, and market power it gains in the service of the Chinese state, to the detriment of U.S. national security."

The commission notes that the Chinese government gives subsidies to state-owned enterprises to influence decisions by firms to achieve state goals.

"Despite repeated pledges to let the market play a 'decisive role' in resource allocation, Beijing continues to use state-owned enterprises as a tool to pursue social, industrial, and foreign policy objectives, offering direct and indirect subsidies and other incentives to influence business decisions and achieve state goals," the report states.

According to the report, the Chinese government can influence and control private firms through political connections, financial support, and extralegal control.

The majority of Chinese companies, 95 out of the top 100 firms by revenue, were controlled by a former or current member of a central political organization.

In terms of financial support, many private firms rely heavily on the government. For example, Geely Automobile got more than half of its net profits in 2011—$141 million—from government subsidies.

Private firms are also subject to regulations that supervise and coordinate their activities.

"Compulsory participation in these state-led industrial restructuring efforts, along with other forms of pressure from regulators to comply with government-favored policies, contribute to the state's extralegal control over private enterprises," the Commission writes.

The Commission's recommendation to bar Chinese state-owned enterprises from obtaining U.S. firms comes at a time when there has been a record amount of Chinese investment in the United States.

Chinese firms invested $18.4 billion in the United States in the first half of 2016, almost three times what was recorded for the first half of 2015, according to a report from the Rhodium Group, a firm that tracks Chinese direct investment in the United States.

"Notwithstanding rising debt levels, Chinese companies are increasingly acquiring foreign companies in strategic sectors to earn government subsides and other incentives," the report states. "State-owned enterprises in different sectors have varying reasons for looking abroad: energy and resources firms aim to stabilize their domestic supply of resources, avoid price volatility, and learn about new resource extraction methods; technology firms aim to acquire new technology; and manufacturing firms aim to be closer to their target markets and mitigate concerns over protectionism."

Larry Wortzel, a commissioner of the U.S.-China Economic and Security Review Commission, said the United States should not treat Chinese state-owned enterprises as private companies.

"My personal view is that given the record of Chinese Communist Party control and influence over SOEs [state-owned enterprises], and the fact that they are state entities responding to the directives of the Party and PRC State Council, we should not treat them as though they are private companies," Wortzel said. "Chinese companies are not motivated purely by commercial and market considerations. A major factor influencing my decision is that there is no reciprocity."

"While Chinese companies can buy U.S. or Western companies, American and other Western companies are barred from buying key sector state-owned enterprises, if not all state-owned enterprises," he said. "Other factors are the internal subsidies provided by the state to state-owned enterprises that American companies do not get, so that there is no fair competition in the market place."

Update 4:43 P.M.: This story has been updated to clarify that the information comes from a draft report. The final report has yet to be released.

Published under: China , Economy