China's Sovereign Fund Pushes for Greater Access to Sensitive U.S. Investments

 | Jul 12, 2017 | 9:00 AM EDT
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China's sovereign wealth fund, the China Investment Corp., has this week pressed U.S. authorities to grant it greater access to U.S. markets, at a time U.S. lawmakers are urging greater scrutiny over Chinese deals. 

"We hope that the U.S. government will provide us with a more liberal, equal and nondiscriminatory investment environment," Liu Fangyu, the fund's managing director, said according to The New York Times.

It could be a good marriage. The CIC, as a long-term investor, finds infrastructure investments particularly attractive. That meshes well with the priorities of the Trump administration -- although, of course, Donald Trump was particularly strident in his criticism of China on the campaign trail.

Chinese investment into the United States tripled in 2016 to $46 billion, compared with the previous year, according to research company the Rhodium Group.

White House officials and a group of U.S. lawmakers are, however, pushing for new laws that would scrutinize Chinese investment into the United States more closely. They would like to expand the powers of the Committee on Foreign Investment in the United States, which can block deals from foreign investors for national security reasons.

Such a change would require Congressional approval. But many within Trump's team would like to see tougher controls over the flow of Chinese money into the United States.

The Republican Senator John Cornyn from Texas says he will propose legislation to take a "tougher line" over investments from "nations that pose a clear threat to our national security, focused particularly in the area of advanced technology."

Critics are already watching two proposed deals carefully to see how the foreign investment committee responds. That's the $1.2 billion bid for the Dallas-based remittance company MoneyGram (MGI) by Ant Financial, a subsidiary of e-commerce giant Alibaba (BABA) , and the $1.3 billion offer for communications chip maker Lattice Semiconductor (LSCC) by the private-equity fund Canyon Bridge Capital Partners, which has ties to the Chinese government.

Canyon Bridge has filed three times for approval by Committee on Foreign Investment, attempting to convince the committee that it will run Lattice without influence by the Chinese government. Canyon Bridge, Reuters reports, has indirect links to China's space program.

The committee has been particularly tough on deals involving chip technology and telecommunications. The Pentagon has even said it is concerned about the flow of Chinese funds into technology, such as artificial intelligence and robotics.

The Pentagon said the formation of Canyon Bridge was an attempt to mask the fact that the capital for the Lattice deal was coming from the Chinese government, to make it easier to get governmental approval for the purchase. Canyon Bridge denies that.

The CIC has already invested more than $90 billion in the United States, mostly in public markets and financial companies. But it would like to step up investment in U.S. real estate, infrastructure and technology.

It has invested in the United Kingdom in potentially controversial projects such as London's Heathrow Airport, and the Thames Water utility that supplies the British capital with water. Late last year, it was part of a team including the Australian investment bank Macquarie (MQBKY) and several other investors that bought a controlling stake in the gas-distribution wing of Britain's National Grid for $4.65 billion.

Liu, who is also head of public relations and international cooperation for the CIC, said such "symbolic investments" are difficult in the United States because of objections from Congress.

The CIC, in its 2016 annual report released on Tuesday, said it made a net profit of 6.22% on its international investments. That helped boost its total assets to $813.5 billion. The fund lost about 3% in 2015 and has posted a cumulative net annual return of 4.76% since its formation in 2007.

It invested about $19 billion in outbound deals in 2016, according to data from Dealogic, triple the $6.4 billion it invested overseas in 2015.

The recent actions of the United States, for instance in approving $1.42 billion in weapons sales to Taiwan, also indicate that any get-to-know-you warmth generated by Chinese President Xi Jinping and Trump when they met in April at Trump's Florida Mar-a-Lago resort has dissipated.

China has been more strident in its warnings about U.S. foreign policy, as I explained last week, Xi warning Trump in a phone call that "negative factors" were emerging in the U.S.-China relationship.

Liu at the CIC said she still holds out hope that the Mar-a-Lago summit is a sign that things are moving in the right direction. She is confident that the Trump administration "will provide us more investment opportunities."

Xi and Trump agreed at that meeting to come up with an action plan for cooperation on trade. That was due to be delivered within 100 days -- setting the deadline at this Sunday.

China has also warned that Chinese money should be free of baggage.

"There should not be undue political dimensions imposed on commercial takeovers, let alone political intervention," Lu Kang, a spokesman for China's foreign ministry, said.

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