Research On National Security Review Risk And Countermeasures Of Chinese State-owned Enterprises’ Direct Investment In The U.S.

Since the strategy of “Going Out” was promoted,Chinese state-owned enterprises have been active in foreign direct investment activities in virtue of their huge capital volume and supportive policies from the Chinese government.According to the “2016 Statistical Bulletin of China’s Outward Foreign Direct Investment”,Chinese state-owned enterprises are the main force of China’s foreign direct investment.However,when investing in the United States,the investment activities of the state-owned enterprises appear to be disadvantageous.“Research Report on China-US Economic and Trade Relations” by Ministry of Commerce of China pointed out that the CFIUS’ national security review of foreign capital M&A poses a serious obstacle to Chinese companies’ investment activities in the United States.China has now become the one amongst all that has received the most national security reviews in the United States.Due to their "state-owned" nature,China’s state-owned enterprises have received numerous national security reviews from the CFIUS.According to a research report by Rhodium Group,Chinese state-owned enterprises only accounted for less than 10% of the US investment in 2017.Therefore,it is necessary to study the US national security review system for foreigncapital M&A and propose a solution to the problem that Chinese state-owned enterprises often encounter with difficulties in the US national security review.The development history of the US national security review system for foreign M&A is a process by which the United States has increasingly limited the openness to foreign investment.From the establishment of CFIUS in 1975 to the formulation of the "Foreign Investment and National Security Act of 2007",the US open-ended investment policy has been increasingly influenced by national security concerns.As for reviewed object,the U.S.foreign-invested national security review include any transaction that is proposed or pending after August 23,1988,by or with any foreign person,which could result in control of a U.S.business by a foreign person.The broad recognition of "foreigners" and "U.S.business" makes the scope of the transactions reviewed by CFIUS in practice also very broad.As for review standard,the U.S.has not yet defined "national security" in detail,only has listed 11 "national security" considerations,laying the risk of trade protectionism for foreign direct investment.In addition,this article analyzes the controversial issue of CFIUS’recognition of Chinese state-owned enterprises’ investment in the U.S.as "foreign government-controlled transactions".Under the current CFIUS recognition of foreign government-controlled transactions,Chinese state-owned enterprises will almost certain to encounter the CFIUS national security review while investing in the U.S.CFIUS,the President,and the Congress each perform their duties in the current U.S.national security review system on foreign investment.CFIUS is responsible for reviewing M&A transactions that have national security threats.The President is responsible for exercising the decision to suspend or prohibit the transaction when CFIUS confirms that a foreign M&A transaction has a national security threat or fails to reach a consensus.The U.S.Congress is responsible for exercising oversight of transactions with national security threat through the CFIUS certification system,annual reporting system,and inquiry systems.In theory,the Congress has authority to oversight every reviewed transaction.On the basis of studying the typical case of the acquisition of Western Digitalby Ziguang,this paper analyzes the reasons why state-owned enterprises face the challenge of U.S.national security review.This paper also separately analyzes both inner systematic and outer factors of whether frustration of Chinese state-owned enterprises’ investment in the U.S.is caused by the U.S.national security review system itself.In aspect of the inner systematic factors,these include that Chinese state-owned enterprises prefer M&A as major manner of transaction targeting industries with critical infrastructure and critical technologies;Chinese state-owned enterprises have problems with the management system,transparency and state subsidies.As for outer factors,Chinese government lacks reciprocity in admission to market for foreign investment from the U.S.;the U.S.political concerns and‘inappropriate’ supervision on the national security review procedures.After a comprehensive analysis of the reasons,this paper attempts to propose legal advice from two perspectives,national level and the state-owned enterprise level.At the national level,this paper proposes,firstly,to reform the governance system of China’s state-owned enterprises;secondly,to enforce the principle of reciprocity and the signing of bilateral investment agreements;thirdly,to improve China’s overseas investment risk assessment,early warning.At the enterprise level,this paper proposes,firstly,to lower the risk by trading based upon full understanding of the host country’s laws and security review system,cautious selection of transaction mode and targeting industry,and better the enterprise’s transparency;secondly,enhance public relation communication with the U.S.public,mass media and the Congress;thirdly,adopt voluntary notices during the security review process(informal consultation process)and adopt mitigation measures,thus to improve the coping ability of risks.The body of this paper is divided into four chapters.The first chapter is an introduction in which the author first clarifies the definition of a state-owned enterprise and foreign direct investment.Based on the definitions,the author analyzes the trend of investment of Chinese state-owned enterprises in the U.S.and how CFIUS has become a serious impediment to suchinvestment activities;followed by subsequent discussions on the national security review system for foreign investment in the U.S.The second chapter is the overview of the U.S.national security review system.The author elaborates the legislation evolution of the system and analyzes the recognition of reviewed object,review standard,and "foreign government-controlled transactions";also the framework and duty of each authority.The third chapter mainly puts forward the reasons why state-owned enterprises encounter the challenge of U.S.national security review.Based on the detailed elaboration of the system,the author chose the case of the acquisition of Western Digital by Ziguang to empirically analyze in detail the specific factors that may cause national security concerns,and further integrated both inner systematic and outer factors.The fourth chapter will propose suggestions from both national and enterprise levels.Hopefully,this article will help improve the ability of state-owned enterprises to invest in the U.S.in responding to the risk of U.S.national security review.