U.S. Congress urged to crack down on Chi­nese in­vest­ment as Canada opens door

The Globe and Mail (Alberta Edition) - - NEWS - ROBERT FIFE STEVEN CHASE OT­TAWA

A U.S. con­gres­sional watch­dog is call­ing for stricter over­sight of in­vest­ments or takeovers by Chi­nese com­pa­nies and a ban on Bei­jing’s state-owned or state-con­trolled en­ti­ties from buy­ing U.S. as­sets – a dra­mat­i­cally dif­fer­ent ap­proach to China than the one Ot­tawa is tak­ing.

The an­nual re­port to Congress by the U.S.-China Eco­nomic and Se­cu­rity Re­view Com­mis­sion ar­rives shortly be­fore Prime Min­is­ter Justin Trudeau is ex­pected to be­gin free­trade talks with China that could ul­ti­mately see Canada re­lax con­trols over Chi­nese in­vest­ment in this coun­try.

The fed­eral gov­ern­ment has al­ready sig­nalled a greater will­ing­ness than the pre­vi­ous, Con­ser­va­tive gov­ern­ment to open Canada’s econ­omy to Chi­nese in­vest­ment, al­low­ing a high-tech takeover that was banned un­der for­mer prime min­is­ter Stephen Harper to pro­ceed and ap­prov­ing an­other one with­out a for­mal na­tional se­cu­rity re­view.

In con­trast, the U.S. re­port says Wash­ing­ton needs to be vig­i­lant as China ex­pands in­vest­ments in new tech­nol­ogy and in­dus­tries around the world such as ro­bot­ics, ar­ti­fi­cial in­tel­li­gence, in­for­ma­tion com­mu­ni­ca­tions, biotech­nol­ogy and agri­cul­ture.

“These in­vest­ments lead to the trans­fer of valu­able U.S. as­sets, in­tel­lec­tual prop­erty and tech­nol­ogy to China, pre­sent­ing po­ten­tial risks to crit­i­cal U.S. eco­nomic and na­tional se­cu­rity in­ter­ests,” the re­port says.

Chi­nese in­vest­ment in the United States has risen dra­mat­i­cally over the past half-decade, it notes. On a cu­mu­la­tive ba­sis, the amount in­vested in key sec­tors rose to $46.2bil­lion (U.S.) in 2016 from $4.6-bil­lion in 2010.

Mean­while, Chi­nese for­eign di­rect in­vest­ment in Canada to­talled $5.2bil­lion (Cana­dian) in 2016, down from $10.2-bil­lion in 2010, ac­cord­ing to the Univer­sity of Al­berta’s China In­sti­tute.

The con­gres­sional com­mis­sion says China’s au­thor­i­tar­ian Com­mu­nist Party ex­er­cises enor­mous in­flu­ence over all Chi­nese cor­po­ra­tions – whether they are state-owned or pri­vately run.

“Some pri­vate Chi­nese com­pa­nies op­er­at­ing in strate­gic sec­tors are pri­vate only in name, with the Chi­nese gov­ern­ment us­ing an ar­ray of mea­sures, in­clud­ing fi­nan­cial sup­port and other in­cen­tives as well as co­er­cion, to in­flu­ence pri­vate busi­ness de­ci­sions and achieve state goals,” the re­port says.

Some Chi­nese firms even seek to ob­scure their deal­ings in the United States through the use of U.S.-based shell com­pa­nies or try to drive down the value of U.S. as­sets through so­phis­ti­cated cy­beres­pi­onage cam­paigns and then ac­quire the firms, the re­port says.

Na­tional se­cu­rity agen­cies in both Canada and the United States have warned that com­pa­nies owned or partly owned by the Chi­nese gov­ern­ment are not merely profit-seek­ing op­er­a­tions; they are also prone to pass­ing on in­for­ma­tion or tech­nol­ogy to Bei­jing and mak­ing busi­ness de­ci­sions that could con­flict with Cana­dian in­ter­ests but serve the agenda of the Com­mu­nist Party of China. The com­mis­sion warns that China is in­creas­ingly clos­ing its econ­omy to for­eign­ers – even as it lever­ages the open­ness of the United States and other mar­ket-based economies.

“As new laws come into ef­fect chok­ing off the abil­ity of for­eign com­pa­nies to ac­cess and trans­fer vi­tal busi­ness in­tel­li­gence across China’s bor­ders, ma­li­cious Chi­nese ac­tors en­gage in cy­ber-en­abled theft of for­eign in­tel­lec­tual prop­erty,” the re­port says.

“Large and lu­cra­tive por­tions of China’s econ­omy, in­clud­ing many high-tech sec­tors and fi­nan­cial sec­tors, are closed to for­eign firms.”

The com­mis­sion says Congress must up­date its for­eign-in­vest­ment re­view laws to ban Chi­nese sta­te­owned or state-con­trolled firms from buy­ing U.S. com­pa­nies. It is call­ing for a manda­tory re­view of any trans­ac­tion that would give a Chi­nese firm con­trol­ling in­ter­est in a U.S. as­set. It also rec­om­mends pro­hibit­ing any ac­qui­si­tion or in­vest­ment that would “con­fer con­trol with re­gard to crit­i­cal tech­nolo­gies or in­fra­struc­ture.”

The com­mis­sion also says any pro­posed pur­chase of a me­dia prop­erty by a Chi­nese en­tity should be re­viewed to en­sure it will not be used to in­flu­ence U.S. pub­lic opin­ion and pro­mote Chi­nese Com­mu­nist Party pro­pa­ganda.

Canada has sim­i­lar leg­is­la­tion, but it is far weaker than what the U.S. com­mis­sion is propos­ing. The In­vest­ment Canada Act re­quires a net ben­e­fit test for any for­eign takeover val­ued at $1-bil­lion or more. This en­tails a stan­dard se­cu­rity anal­y­sis, but the cab­i­net can order a much more thor­ough na­tional se­cu­rity re­view that would an­a­lyze the po­ten­tial im­pact on Canada’s de­fence and se­cu­rity in­ter­ests and in­ves­ti­gate the trans­fer of pro­pri­etary tech­nol­ogy out­side Canada.

China’s am­bas­sador to Canada, Lu Shayne, has made it clear that Bei­jing does not want Canada to con­duct na­tional se­cu­rity re­views of Chi­nese takeovers, call­ing it a form of pro­tec­tion­ism.

Since the Trudeau Liberals came to power, they have al­lowed a num­ber of Chi­nese takeovers of Cana­dian com­pa­nies with­out se­cu­rity re­views.

In March, the cab­i­net re­versed a de­ci­sion by the for­mer gov­ern­ment to block the sale of Mon­treal-based ITF Tech­nolo­gies to O-Net Com­mu­ni­ca­tions of Hong Kong. Canada’s spy agency had rec­om­mended against the sale be­cause it would give China ac­cess to “ad­vanced mil­i­tary laser tech­nol­ogy.”

In June, de­spite se­cu­rity con­cerns raised in Wash­ing­ton, the gov­ern­ment al­lowed the sale of Van­cou­ver­based Nor­sat In­ter­na­tional Inc. to Chi­nese tele­com gi­ant Hytera Com­mu­ni­ca­tions. Ot­tawa did not ask its se­cu­rity of­fi­cials to con­duct an of­fi­cial na­tional se­cu­rity re­view – even though Nor­sat sells satel­lite com­mu­ni­ca­tions equip­ment to the U.S. mil­i­tary, and Hytera has busi­ness deal­ings with China’s se­cu­rity agen­cies.

Ot­tawa also ap­proved the sale of a large re­tire­ment home chain in Bri­tish Columbia to An­bang, one of the big­gest Chi­nese firms pur­su­ing high­pro­file over­seas ac­quis­tions and in­vest­ments. The gov­ern­ment later said the deal would go through de­spite the fact An­bang CEO Wu Xiao­hui was de­tained by au­thor­i­ties with­out ex­pla­na­tion.

Last month, CCCC In­ter­na­tional Hold­ing Ltd., a state-owned com­pany, pur­chased Ae­con Group Inc., a Cana­dian con­struc­tion firm that has cre­ated land­marks such as the CN Tower and has done work on mil­i­tary bases, uni­ver­si­ties and the Dar­ling­ton Nu­clear Gen­er­at­ing Sta­tion, for $1.5-bil­lion.

Ot­tawa has yet to say if it plans to con­duct a sep­a­rate na­tional se­cu­rity re­view of the deal in ad­di­tion to the stan­dard re­view re­quired by the In­vest­ment Canada Act.

CCCC In­ter­na­tional has been banned from bid­ding on World Bank con­struc­tion projects for its role in a bid-rig­ging scheme in the Philip­pines. It also helped China as­sert its sovereignty in the dis­puted South China Sea by build­ing is­lands there.

As new laws come into ef­fect chok­ing off the abil­ity of for­eign com­pa­nies to ac­cess and trans­fer vi­tal busi­ness in­tel­li­gence across China’s bor­ders, ma­li­cious Chi­nese ac­tors en­gage in cy­ber-en­abled theft of for­eign in­tel­lec­tual prop­erty.

U.S.-China Eco­nomic and Se­cu­rity Re­view Com­mis­sion re­port to U.S. Congress

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