As the threat of a crackdown on Chinese takeovers in the US looms under a Trump administration, one question being asked on Wall Street is whether Washington will move to limit acquisitions of US financial services companies like investment banks, brokerages and private equity firms.
Chinese financial M&As in the US are not yet targets of an ongoing Congressional campaign to limit Chinese acquisitions on economic grounds. But a former senior official of the Committee on Foreign Investment in the United States (CFIUS) says it’s possible such Chinese deals will face increased scrutiny in the future.
“Could tensions arising in US-China relations and a new Trump team actually start affecting Chinese purchases of US financial companies? The answer is ‘yes,’” says the ex-US official, who spoke on condition of anonymity. He stressed, nonetheless, that there’s “no guarantee” that a crackdown will occur and that CFIUS may still allow “small” acquisitions of US financial firms by the Chinese to go through.
CFIUS is an interagency US government panel that has the power to approve or disapprove all foreign takeovers on national security grounds.
The former high-ranking CFIUS official noted that China’s reciprocity in permitting US financial companies to do similar deals in China will go a long way in deciding future US attitudes toward Chinese acquisitions on Wall Street. He also says the successful negotiation of a long-stalled US-China bilateral investment treaty (BIT) that sets binding rules governing the treatment of foreign investors and investments from each country will be a key in defusing such tensions.
Size matters
The scale and likely impact of any financial M&A being proposed by Chinese investors will also determine if CFIUS will block the transaction, according to the former official.
“If a Chinese company is getting a significant portion of a company like JP Morgan or Citi or Goldman, I can see there being a CFIUS review. But if they were buying a broker-dealer or mutual fund you or I have never heard of — I don’t know if that would have to go through CFIUS,” the former official added.
He says another tripwire is whether the acquisitions reviewed by CFIUS will give Chinese interests control of a significant portion of the US financial infrastructure — such as banking networks or trading systems.
Chinese companies, so far, have shown only moderate interest in acquiring US financial firms. Since 2015, major bids include a still-pending proposal by insurer Anbang to buy Fidelity& Guaranty Life for US$1.6 billion.
Chinese investors led by Chongqing Casin Enterprise Group have also proposed to purchase a 49.5% stake in the Chicago Stock Exchange in another pending deal that drew criticism during a Republican presidential debate from Donald Trump.
Being acquired by a Chinese investor could prove compelling for some Wall Street players. The big selling points are that it provides capital and makes it easier to access China’s growing financial markets.
At the same time, such deals will likely stir Congressional concerns over giving China too much control over America’s financial infrastructure. Many lawmakers are already wary of Beijing’s creation of a rival Asian Infrastructure Investment Bank, an ambitious One Belt, One Road project in Central Asia, and a push to make the yuan a global currency.
The US-China Economic and Security Review Commission, a legislative watchdog panel, recommended as part of its 2016 annual report that: “Congress direct the US Department of the Treasury to prepare a report analyzing US exposure to China’s financial sector and the impact of China’s financial sector reforms on the US and global financial systems. This report should also identify the policies the US government is or should be adopting to protect US interests in response to this changing environment.”
The commission’s recommendation isn’t binding on Congress and doesn’t specifically mention Chinese financial M& As here. But the reference to China’s financial “reforms” and their global impact could take in Chinese efforts to expand their presence in financial capitals like New York by acquiring Wall Street firms.
The former CFIUS official says the commission has the reputation of being a “hawkish” panel that Congress hasn’t taken seriously in the past. But he says its influence may increase under a Trump administration and a Republican-controlled Congress.
From the US side, the former CFIUS official notes that rising concern over Chinese acquisitions is being fanned by a huge jump in the number of such proposals. He says CFIUS, on average, annually reviews only about 15%-20% of the more than 1,000 cross-border transactions proposed by buyers from all foreign countries in a given year.
Of the roughly 150-200 cross-border deals that CFIUS reviews yearly, he estimates that over 70 are now from China. He says this compares with the minuscule number of Chinese M& As 10 years ago, the vast majority of which never went to CFIUS because they didn’t raise national security concerns.
Reciprocity is key
“The number of proposed Chinese direct investments in the US has grown exponentially in the last decade,” the former official said. “That has raised flags. People [in Washington] are asking what is going on? Why are there so many Chinese investments?”
The other issue haunting Chinese financial acquisitions in the US is the ability of American firms to make similar M& As in China. US investors currently cannot take majority control of Chinese financial companies.
The ex-official says this rankles the US which gives China considerably more latitude in acquiring US companies in various industries. The signing of a US-China BIT, under negotiation since 2008, would put prospective US acquirers on a fairer footing and counter critics of Chinese investments in America.
Bilateral talks throughout this year to reach an agreement on a BIT have been unsuccessful, but the former CFIUS official says it’s possible an accord could be concluded by a Trump administration. “I think Trump has some inclination toward a BIT. If I were the Chinese, I would be thinking: how do I get to the Trump team and create a BIT that makes sense,” he said.
Doug Tsuruoka is the Asia Times Editor-at-Large