The relationship between countries is often a bit like trend trading!
According to the Wall Street Journal, a new department affiliated with CFIUS is carefully reviewing Chinese investment in US start-up technology companies in the past few months and even years, and may announce a large number of penalties.
According to former US government officials and staff, the law enforcement agency also works closely with the Federal Bureau of Investigation (FBI) to track technology investments that intelligence officials believe may pose a threat to US national security.
The research results of American consulting firm Horizon Advisory show that the number of venture capital transactions by China in U.S. companies in 2020 has increased to 308, a record high since 2016.However, the total transaction volume has declined, which shows that most single transactions are relatively small investments and do not grant control to Chinese investors.
So, what happened?Why is Biden, who has just been in power for 12 days, is more hawkish than he thought?
U.S. tripped again
According to the Wall Street Journal, a national security team investigating Chinese investment in US technology companies is scrutinizing those startup investments that have been in place for months or even years.
According to former government officials and former staff, the Cfius law enforcement team works closely with the Federal Bureau of Investigation (FBI) to track technology investments that intelligence officials believe may pose a threat to US national security.These people said that the FBI is responsible for maintaining a master database that covers transactions involving foreign investors that raise security concerns. Cfius members classify these transactions based on threat assessments provided by the FBI and other intelligence agencies.People familiar with the matter said that Cfius is concerned about early investments made by China through intermediaries. Such indirect investment methods conceal the true source of funds.
Cfius is responsible for examining whether foreign investments in US companies and real estate have potential national security risks. Cfius is bound to become a key force in the strategy of US President Jill Biden to contain China's technological ambitions.According to people familiar with the matter, the Cfius law enforcement team recently recruited professionals from venture capital companies, investment banks, and professionals with technical backgrounds.Lawyers, investors and national security officials said that the aforementioned Cfius team has sent letters to dozens of companies and called to request information on transactions with foreign investors.
People familiar with the matter said that some of the early research has been conducted for several months, because reviewing venture capital transactions can be complicated and time-consuming.Although some research has prompted the government to launch a formal investigation, a large part of law enforcement is still in its early stages.
These people familiar with the matter said that a large number of penalties are expected to be issued later this year, which may be fines, changes in corporate governance, or even withdrawal of capital.
The actions of Cfius in the past year have shaken the widespread skepticism in the venture capital industry, that is, whether an unreliable government agency can really intervene in the rapid transactions of startups and lock in suspicious funding sources.
For example, a person familiar with the matter disclosed that Cfius has reminded several start-ups that Cfius is reviewing seed-stage investments of less than US$50 involving an investor connected with China, and these actions have eventually led to the suspension of related transactions.
According to a person familiar with the matter, last year, Cfius ordered the divestment of Chinese investors’ equity in two semiconductor industry venture capital firms.The person familiar with the matter said that these China-related investments occurred in 2018 and 2019; the relevant investors could still make profits after disposing of these equity last year.
Chinese venture capital in the US is mostly small
According to research conducted by Horizon Advisory, an American consulting firm that focuses on China issues, the number of Chinese venture capital deals with U.S. companies increased to about 308 last year, the highest level since the record high in 2016.However, Nathan Picarsic, co-founder of Horizon Advisory, said that the total investment amount of venture capital transactions has shrunk, indicating that most transactions are smaller investments and have not allowed Chinese investors to gain control of US start-ups.
National security officials and others related to Cfius said that the Biden administration will clearly indicate which technologies are critical to the U.S. military, and that these technologies are necessary when China, Russia, and investors from other rivals want to invest. To be protected.Many of these technologies are developed by start-up companies. Knowing which technologies should be protected will allow Cfius to act quickly.
A Biden spokesperson said that this administration "will ensure that Cfius evolves into a 21st century committee that can properly assess new and changing risks."
The Foreign Investment Risk Review Modinization Act passed by the two parties in 2018 expanded Cfius’ powers to allow Cfius to investigate minority investments in U.S. companies that manufacture key technologies by venture capitalists, and Focus on Chinese capital.
This legislation also caused some start-ups to reject investment from China, and some investors chose to withdraw.However, according to investors, defense officials, and lawyers, many transactions are still possible due to loopholes in the law and the ambiguity of the consequences of bypassing the Cfius approval process.
Investments in start-ups can be exempt from many disclosures required by listed companies. Cfius launched a new confidential reporting hotline last year to help identify suspicious transactions.Start-up executives and lawyers said that in some cases, it was the company that reported to Cfius that a competitor was connected to a foreign investor.
Cfius's targeting of venture capital has caused some start-ups to change their minds.Lawyers and start-up investors say that more companies seek Cfius approval before completing transactions and agreeing to some concessions to win government approval, which will ensure that they will not be targeted in future investigations.
Mario Mancuso, head of international trade and national security practices at Kirkland & Ellis LLP, said that venture capital is under very strict scrutiny.He said that it cannot be overemphasized on security issues.
Why is Biden more hawkish than imagined?
In fact, when the "Foreign Investment Risk Review Modernization Act" was promulgated in the morning, Gao Feng, the spokesperson of the Ministry of Commerce of China, said that we have noticed the relevant statement released by the White House last night Beijing time and will pay close attention to the US "Foreign Investment Risk Review Modernization Act." The progress of legislation in China, and the potential impact on Chinese companies will be assessed.
Gao Feng said that China always believes that investment facilitation should be continuously promoted in the field of international investment, and does not approve of tightening foreign investment conditions on the grounds of national security.China has also clearly expressed its opposition to other obstacles set by the United States.
So why is Biden more hawkish than imagined?In fact, just last night, Biden originally had a speech on foreign policy propositions, but he did not know why he cancelled it.In fact, judging from the recent actions of the Biden administration, Trump's trajectory towards China has not changed.
The new Secretary of State Anthony Brinken said at the confirmation hearing that Trump was right to take a hard line on China.Previously, Gina Raimondo, the nominee for the head of the US Department of Commerce, refused to promise to remove the Chinese telecommunications equipment manufacturer Huawei from the “physical list”, which made it difficult for US companies to export technology to their companies.
Paul Haenle, the former China Director of the National Security Council (NSC) under the leadership of George W Bush and Barack Obama, said that Biden has so far "doed right to China" Up".
Mr. Haenle said: “The Trump administration was right to make the change, but the way they did it was self-deceiving, very incoherent and fragmented.” He added that the new administration must also contend with Congress’s advocacy of a tougher approach. China.
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