President Trump this week signed into law a $717 billion defense spending bill. Media coverage focused on its largesse and the fact that, at the signing ceremony, Trump refused to acknowledge its namesake, Sen. John McCain. But a crucial feature of the legislation—a section codifying a profound shift in America’s openness to foreign investment—was mostly ignored.
The key investment changes were spelled out in the Foreign Investment Risk Review Modernization Act, (a.k.a. FIRRMA). That’s not a moniker that lends itself to catchy headlines. But make no mistake: FIRRMA is a big deal—for foreign firms seeking to invest in the U.S., and also for American companies with global operations, U.S. venture capital and private equity firms with foreign investors, and potentially anyone who sells or licenses technology developed in America to non-U.S. customers.
Financial Times columnist Rana Foroohar was among the few journalists to spot FIRRMA’s significance. The act, she noted, renders national security the dominant consideration in evaluating foreign investment in America and “strengthens the role of Department of Defense and the intelligence community in deciding who should and should not be allowed to invest in the U.S.”
FIRRMA doesn’t mention China by name. But it’s clear China is the main target. The Economist observes that, “while Mr Trump and China continue to spar over trade tariffs, FIRRMA reflects a fight over Chinese investment in American technology startups that is less visible but which nonetheless may have serious consequences for Silicon Valley.” According a report by the Rhodium Group, Chinese investment in the U.S. came to less than $2 billion in the first half of 2018, down from $29 billion last year and a record $46 billion in 2016. FIRRMA limits chances of a recovery.
The U.S. Treasury summarizes FIRRMA’s key provisions here. White & Case offers an analysis here. For global businesses, the two main things to know about FIRRMA are: 1) that it dramatically expands the authority and resources of the Committee on Foreign Investment in the United States (CFIUS), the interagency group that advises the president on when to block foreign takeovers of U.S. businesses on national-security grounds; 2) that it broadens CFIUS jurisdiction to include a far wider range of investments.
The big picture is that FIRRMA, which passed with bi-partisan support, reflects a fundamental change in America’s thinking about the free movement of capital. Until recently, the mantra among U.S. political and business leaders was that the benefits of foreign investment outweighed the risks; in a free market, American innovation would prevail. That confidence is gone. Matt Sheehan, writing on the Macro Polo blog, notes that FIRRMA takes an expansive view of what constitutes a threat to national security, instructing CFIUS to consider “whether the transaction is likely to reduce the technological and industrial advantage of the United States relative to any country of special concern.’’
In the new climate of fear, American as well as Chinese investors risk running afoul of FIRRMA. Foroohar wonders about SenseTime, “an AI company in Beijing with facial recognition software used with CCTV footage and digital payment systems [that] has received funding from Qualcomm, Silver Lake, Tiger Global Management and Fidelity.” The Economist points out that “Uber and Lyft, the messaging app Snap, virtual-reality firm Unity Technologies, cancer-testing firm Grail, financial-tech firm Sofi, augmented-reality firm Magic Leap and others, have taken Chinese money.” Says Bobby Franklin, president of the National Venture Capital Association: “FIRRMA will leave a broad mark.”
More China news below.
Economy and Trade
Talk soon! A Chinese delegation from the Ministry of Commerce will travel to the U.S. next week to hold talks on trade, as the two nations both gear up to impose $16 billion of new tariffs. The talks will be hosted by the Treasury Department’s under secretary for international affairs, Davis Malpass. Given that previous talks between Liu He and Steven Mnuchin, both senior officials, failed to avert the trade war in the first place, hopes that a resolution will be reached next week are low. Nevertheless, markets in Asia and the U.S. responded positively to the news of a potential thaw in relationships, with major index trackers from both hemispheres showing a slight rise. South China Morning Post
Belt and Road woes. Malaysian Prime Minister Mahathir Mohamad arrived in Beijing yesterday for his first visit to China since regaining power in May. Days earlier, the 93 year-old prime minister stoked tension by suggesting that Malaysia would cancel two China-backed development projects billed as part of the Belt and Road Initiative. The potential cancellation comes against a backdrop of other countries falling into debt traps over China-funded projects. China responded to Mahathir’s threat in a statement faxed to the Associated Press, urging that any problems should be “handled properly through friendly negotiation”. Associated Press
Yuan yanked. China has banned banks in its free trade zones from certain lending activities in a bid to tighten offshore yuan liquidity and make it more costly to short. The move comes as the yuan weakens against the U.S. dollar for the ninth week straight, reaching a 15-month low. Reuters
Innovation and Tech
Tencent tumbles. Tencent’s tough year got worse this week when its market value was delivered two blows in quick succession. First, $15 billion was wiped off its market cap when regulators demanded it retract Monster Hunter: World, a highly anticipated game with over a million pre-orders, just days after it was released. Tencent felt obligated to offer full refunds to all its disappointed customers. Second, the company’s second quarter earnings report, released Wednesday, revealed the first YOY decline in quarterly profits for nearly 13 years, prompting another $25 billion sell off. Since its peak in January, Tencent has shedded $170 billion from its market cap, and the plummet appears to have impacted companies worldwide. Bloomberg
Google gripes. More than 1,000 Google employees signed a letter to company executives criticizing the alleged development of a censored search and news service for the China market. The employees are demanding greater transparency in internal decision making so that they are able to make “ethically-informed decisions about our work, our projects, and our employment.” A previous protest from employees successfully prevented Google from renewing a contract with the Pentagon to help develop AI weaponry. This latest upset could further hinder Google’s delicate return to a market it left eight years ago in protest of censorship. New York Times
Chrome plates? Redcore, a Chinese internet start-up, raised $36 million this week on the back of claims that it had developed China’s first web browser with “fully homegrown core technology and intellectual property, breaking the monopoly of the U.S.” Chinese reliance on U.S. components has been a particularly hot topic since tech darling ZTE was brought to a standstill by American sanctions earlier this summer. Unfortunately Redcore has only helped fuel suspicions that China’s tech sector isn’t as powerful as it imagines: internet sleuths uncovered that the browser actually utilizes aspects of Google Chrome’s open source programming. Soon after the discovery, Redcore pulled the browser. Caixin Global
In Case You Missed It
Taiwan’s 85C Bakery Cafe bows to China after boycott threat Hong Kong Free Press
Politics and Policy
Taiwan talks. Taiwan President Tsai Ing-wen asserted the island’s independence during a speech in Los Angeles on Monday, marking the first time in 15 years that a Taiwanese leader has made a political speech on U.S. soil. President Tsai was transiting through America en route to Paraguay and Belize, two of Taiwan’s few remaining diplomatic allies. China’s Foreign Ministry voiced its opposition to the event, prompting the Trump administration to reiterate America’s commitment to the One China policy, which recognizes Beijing as the only legitimate Chinese government. However, the U.S. is Taiwan’s largest arms supplier and, on Tuesday, President Trump signed the National Defense Authorization Act, which includes a commitment to “strengthen defense and security cooperation” with Taiwan, prompting further complaints from Beijing. South China Morning Post
Uighurs at the U.N. China was taken to task at the U.N. last weekend over reports that authorities have forcibly detained one million ethnic Uighurs in the Xinjiang Uighur Autonomous Region, Western China. The reports evidence that members of the Muslim ethnic minority are being imprisoned in “re-education camps” under the pretext of preventing Islamic extremism and terrorism. Critics say the “concentration camps” are a lynchpin in Beijing’s “cultural genocide” of the Uighur populace. In response, a delegation to the UN hearing flatly denied that the camps exist. Meanwhile, an op-ed in the state-run newspaper Global Times admitted that Xinjiang is enduring a “high intensity of regulations” but contended such measures have prevented the region from turning into “China’s Libya”. Vox
Porcine prophesy. A new stamp from China Post is fueling speculation that the government will lift all restrictions on family planning next year, as it faces an aging population crisis wrought by decades of enforcing the One Child Policy. The stamp, unveiled to commemorate the upcoming Year of the Pig, features a cartoon pig family, comprised of a sow, a boar and three happy piglets. Sounds like a stretch, but when the One Child Policy was introduced in 1980, the Year of the Monkey, China Post released a stamp that was a single monkey against a red background. And in 2016, when China converted its One Child Policy into a Two Child Policy, China Post released a stamp illustrating a monkey hugging two offspring (2016 was also the Year of the Monkey). So there might be something behind this philatelic prediction. South China Morning Post