by Xuehan Yang
After hitting a record high in 2016, China’s overseas M&A activity has entered a “pressure period”, which can be said to be squeezed by internal and external supervision. The first wave of pressure from the foreign investment since the end of 2016 domestic tightening regulation, the second wave of the pressure from the United States, since 2017, the U.S. national security review of foreign investment heavily regulated, strengthen the Foreign Investment Risk Review Modernization Act (FIRRMA) by the national security review subject departments namely Committee on foreign investment in the United States (CFIUS) in August this year.
On October 10th America’s Treasury, the arm of CFIUS, tightened the rules further by issuing provisional rules on FIRRMA’s pilot programme.
27 industries facing scrutiny over new U.S. regulations
The interim rules mainly involve two changes. One is to expand CFIUS’s jurisdiction to cover non-controlling and non-passive investments, such as those in key technology sectors, that are subdivided. Second, for the trade of key technologies in the industry covered by the pilot program, a simple and mandatory declaration procedure must be added. A declaration of no more than 5 pages of basic information about the transaction must be submitted 45 days before the expected completion date of the transaction. Failure to do so could result in fines of up to the value of the transaction.
According to information released by the U.S. Treasury Department, the pilot program covers 27 industries, including aircraft manufacturing, aircraft engine and parts manufacturing, computer storage equipment, radio, television and wireless communication equipment, as well as biotechnology research and development, semiconductor and related equipment manufacturing.
The pilot program is scheduled to start November 10. In a statement, the Treasury Department said CFIUS would take public opinion on the interim rules into account in formulating its final rules. CFIUS is also drafting detailed FIRRMA legislation that will be fully implemented in February 2020.
Chinese buyers are looking into new markets in northern and eastern Europe
Chinese investors have been looking to Europe and other unconventional markets for some time amid a tightening regulatory environment in the US.
Germany is a major destination for Chinese investment in the EU, however, the German government is considering further lowering the 25% reporting threshold for non-EU companies buying stakes in German companies to 15% this year, with a need to keep a close eye on key investments in defense, infrastructure and IT.
A similar national-security review framework for foreign investment is also in the pipeline in Britain, amid signs that more Chinese buyers are looking for targets in unconventional markets.
But markets like northern and eastern Europe may not yet have a similar framework. So this might be a good chance for more and more Chinese investors to invest in Netherlands, Finland or other European countries.