The Chinese government’s Foreign Investment Security Review Act, introduced to counter the U.S. Foreign Company Accountability Act, recently went into effect. Some have suggested that this approach could be a “paper tiger” or a weapon to deliver a heavy blow. There is widespread concern about how the current U.S. government should respond.
China’s “Foreign Investment Security Review” has been officially launched, the future of foreign investment into China, if involved in national defense security, important information technology and Internet products and services, important financial services, key technologies and other areas, must take the initiative to declare, after the review of the implementation of investment.
Analysts point out that the Foreign Investment Security Review Measures are designed to counter the U.S. Foreign Company Accountability Act, and are also part of the Communist Party’s efforts to expand its power and manipulate the entire Chinese economy in a way that is not comparable to what democratic countries do. They believe that this initiative has become a thorn in the heart of foreign investors. It is a stupid way to show that the CCP can confront the United States, but in reality it scares away foreign investors.
The former U.S. government introduced the Foreign Company Accountability Act at the end of 2020, stipulating that Chinese companies listed in the U.S. can be forced to delist if they do not comply with U.S. auditing standards, affecting Chinese companies including Alibaba, Baidu, Jindo, China National Petroleum Corporation and other Chinese companies, which was commented as a saber-rattling move against the Chinese Communist Party.
Within a few days, the Chinese Communist Party then released the “Foreign Investment Security Review Measures”, with a total of 23 articles. The official description is that the Foreign Investment Law and the National Security Law are the main legal basis for security review of foreign investment that affects or may affect national security, and the investment can only be implemented after the review is approved.
Countermeasures for Countermeasures’ Sake?
In an interview with Voice of America, Chiu Chien-Min, Dean of the College of Social Sciences at Taiwan‘s Chinese Culture University, said the Foreign Investment Security Review Measures are a Communist Party countermeasure to the United States.
Chiu Chien-min, dean of the College of Social Sciences at the Chinese Culture University. (Photo by Chen Yun)
He said: “I see that mainland China is not confrontational with the United States, it does not have the strength, but it must be counteracted; you (the United States) have policies in place, and some Communist Party officials have begun to ban, some in Hong Kong are banned, so it (China) must have some reaction. I think this is a counter response to Chinese entities.”
According to the Foreign Investment Security Review Measures, investment in mainland China in military industry, military industry support and other national defense security areas, investment in military facilities and areas surrounding military facilities, and investment in important agricultural products, important energy and resources, major equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technology and Internet products and services, important Financial services, key technologies and other important areas, and obtain the actual control of the invested enterprises, foreign investors must declare to the Office of Foreign Investment Security Review Mechanism of the National Development and Reform Commission of China for security review before investing.
Unclear legal concepts
Taiwan Hong Kong Association Chairman Samp. (Photo by Chen Yun)
Dr. Sampson, a doctor of law and chairman of the Taiwan Hong Kong Association, pointed out that there are many uncertain legal concepts in the content of the scheme, which may make foreign investors easily move “out of bounds”. For example, Article 2 of the Measures says that foreign investment, whether direct or indirect, is considered an investment activity, and if it does not set up an enterprise but only to finance, let’s say, business grants or donations to enterprises in China to do things, but it is not involved in the investment itself, so it may also be classified as an investment activity, that is, the law has gone beyond the general narrow definition of investment, and become very broad, the concept of investment can be described as “encompass the mountain and the sea”.
Thorpe pointed out that the approach only speaks of new investments will be affected, but if the legislative purpose of national security, whether the existing investment is affected? Will another security review be required? These all raise questions. For example, if TSMC wants to invest in a 3nm fab in China, China certainly welcomes it, but under the vague concept of national security, the Chinese Communist Party can always take action against foreign investors on the grounds of endangering national security.
Who will determine national security?
If it’s not Time to cut the leeks, of course it’s welcome, it’s good for national security; when it steals all your technology or learns it, you’re hindering national security,” Samp told Voice of America. Therefore, national security is very scary when people with power to decide what is called national security. If one day SMIC completely learns that TSMC set, the concept of national security can float.”
Thorpe said that Article 4, Section 2 of the bill’s “major equipment manufacturing,” “important information technology and products and services,” “important financial services,” “Key technology and other important areas”, such as “important”, “significant” and “key” three words In itself is also full of uncertainty.
For example, if 3nm technology is important, is the periphery of 3nm process considered important? How peripheral to be considered unimportant? These are not clear. Banks are important financial services, but the current prevalence of online payments, community group purchase is not considered a “major financial services”? Are automobiles and wind power generation “major equipment manufacturing”?
There is no real definition in this area, and it’s easy to step on a landmine with such a vague definition,” says Thorpe. And more importantly, such a statement would be tantamount to scaring off a group of people, and China is stupid enough to use this method to show the face of the confrontation with the United States, but in fact it is scaring off foreign investment.”
However, according to Sina.com, Liu Xiangdong, deputy director of the economic research department of the China Center for International Economic Exchanges, told the media that this approach is acceptable to most foreign investors and will not affect their concerns about the opening of the Chinese market. He also said that this security review practice under open conditions is conducive to foreign investors to better define the boundaries of China’s national security and to engage in commercial-type investment and business activities under the premise of ensuring national security in order to effectively prevent and control security risks.
The “measures” have a huge impact on Taiwanese businesses
In an interview with the Voice of America, Chen Yuancheng, former senior executive of Legg Mason Investment Consulting and director of the Chinese Wealth Heritage Advisory Association, argued that the spirit of the Foreign Investment Security Review is to welcome foreigners to invest in China, but as long as sensitive industries are involved, they should be reviewed; the problem with it is that the definition of national security is written in a very general way, and the interpretation is left to the official subjective determination, which will indeed make foreign investors have more consideration before investing. The problem is that the definition of national security is written in a very general way and the interpretation is subjective to the official determination, which will indeed make foreign investors have more considerations before investing.
The problem is that the definition of national security is written in a very general way, and the interpretation is subjective to the official determination, which will indeed make foreign investors have more considerations before investing. (Photo by Chen Yun)
Chen Yuancheng said: “So today it says you are guilty, you will be guilty. Today if I think you have a problem, you have a problem, and if you don’t have a problem, you don’t have a problem, and that’s the key. So today it thinks you this thing helps our future development of China, it will not go to do any action against you, so I think it still lies in their subjective interpretation. At the moment with this law then you just have to the will of the main customs authorities if they think there is a problem, you can go and check.”
The Foreign Investment Security Review Measures are also applicable to Hong Kong, Macau and Taiwan into China’s investment, the measures officially on the road, Taiwan’s Ministry of Economic Affairs issued a special announcement to remind the implementation of the measures in addition to the risk of a high degree of uncertainty, for refusal to declare, provide inaccurate information or conceal information, failure to follow the additional conditions of investment and other violations, but also may be withdrawn from investment, and be included in mainland China National Credit Information System to implement joint disciplinary actions. Once included, the impact on Taiwanese businessmen is significant, and the announcement calls on Taiwanese businessmen to pay attention to the risks.
Mr. Wang, a Taiwanese businessman doing business in China, told the Voice of America that it is difficult for them to distinguish between what is military use and what is commercial use, and what is called military support and what will be related to national security, facing unbearable risks.
High risk of capitalist Taiwan businessmen can hardly bear
Taiwan businessman Mr. Wang said: “For our semiconductor, we do things with the best yield is the military, and then the industrial regulations, and then commercial regulations, eight, ninety percent of commercial regulations is in commercial use, so how do you prohibit, how to cut what is military, commercial this issue? How do I know what is meant by industrial use and what is meant by military use? This interpretation of leniency from the strict, to your displeasure you disable, you can turn a blind eye over. For a businessman, I should tolerate my product this risk (risk) oh, impossible ah!”
Taiwan Hong Kong Association Chairman Samp said, more worrying is that the approach will be submitted to the obligation to review the applicant, that is, to the foreign investors themselves, which is equivalent to officials are not responsible.
Samp said: “If one day it is found that there are national security issues, it is not a problem of officials, you do not come to apply. So how big can this responsibility be? The most serious penalty is that all your already existing investments are completely clean and restored to their original state, which is practically impossible, and is equivalent to confiscation and forfeiture, the communization of the company, very exaggerated, this is the effect of scaring away foreign investment.”
Samp stressed that even though Chinese officials say they welcome Taiwanese and foreign investors to set up factories, the measure is like a thorn in the heart of foreign investors, which is a cold reality that must be faced when investing in a totalitarian dictatorship, that is, all economic activities are unsafe because the dictatorship will do anything to suppress investments in order to achieve their goals.
Taiwanese businessmen switch to invest elsewhere
Mr. Wang, a Taiwanese businessman, believes that the Foreign Investment Security Review Act is a two-edged approach. Although it is intended to counteract the United States, it will also discourage foreign investors from investing in China, and if they invest elsewhere, China’s own economy will be affected, and it is the third party that will benefit.
Mr. Wang, a Taiwanese businessman, said, “I will be concerned, I will be careful, I will consider the aftermath. Rather than this, I simply run to Vietnam, run to Thailand production is good, I run to India on it. For a Taiwanese businessman, he will worry about ah. Just like Trump sanctions SMIC, finished, the biggest beneficiary is UMC. Why? Today all my design house (chip design company) I dare not use SMIC, I’m afraid I can not sell in the future, because of sanctions, today my manufacturer if the chip produced by SMIC I dare not use, there are these risks (risk), so all SMIC single are running to UMC.”
The result of the U.S. and China’s mutual countermeasures, in addition to the possible foreign investment to a third place, the former senior director of Legg Mason Investment Consulting, China Wealth Heritage Advisory Association director Chen Yuancheng also said that the Internet of Things has been the world trend, if the top Internet of Things companies want to bring patented technology to China to invest, but because of the Internet of Things may involve the national security issues in the approach and abandoned, it is a pity for China!
Is this “seven-wound punch” of the Chinese Communist Party hurting itself while countering the US? Zhao Jianmin, Dean of the School of Social Sciences at the Chinese Culture University, said, “Sure, but he can’t help it, or you’ll be suppressed by others, you can’t show too much weakness, Xi Jinping‘s regime is based on his Chinese nationalism, which is strong!
Experts on the superiority of the U.S. Security review
Samp, chairman of the Taiwan Hong Kong Association, further explained why this approach is being pursued by China even though it hurts China itself, he said, because it is an important step in the expansion of a dictatorial system.
If you think that money is what the Communist Party believes in, or this wealthy interest, no; it thinks this power is what it believes in,” Samp said. The way to sustain that power is to expand, it wants to expand its ability to manipulate to different places. This Foreign Investment Security Review is a way to manipulate the entire Chinese economy, that is, foreign investment will come to you if I give it to you, and it will not come to you if I don’t give it to you. It is dictated by the nature of the Communist Party.”
Perhaps many will ask, many countries have foreign investment review methods, other countries can, why not China? Samp said that in democratic capitalist countries, foreign investment and domestic investment can basically be regarded as investment activities under the rules of fair play, but China is a socialist dictatorship, the foreign investment security review as a forbidden domain to manipulate, and whether there is a law or a law can be followed, the subtlety of the use of the law is entirely in the mind of the Chinese Communist Party’s own decision, this is the basic difference.
Samp said: “The U.S. set, the first, can be subject to independent judicial review. The second, he went through the elected parliament to make, can have the public’s supervision. Third, its implementation will be monitored by the press to see if he has violated the principle of the issue. China is completely absent, no freedom of the press, no democratic institutions, no judicial independence, so you see is completely different.”
Samp said that the security trial in the United States and China is not comparable. In the U.S., the security trial approach must be to adduce evidence, and even to hold a hearing, the party under review can ask the government to put forward convincing reasons to explain in which aspects of the violation of national security; the person under review can also seek judicial pipeline relief if they feel it is unreasonable. But in China, Samp said, the courts are communist and the media are communist.
He said, “The national security that the United States guarantees is the security of a community of a bona fide American people formed out of a democratically elected government, and the national security of China is not really the security of 1.4 billion people, it’s just the security of those hundreds of families of the Chinese Communist Party power elite, so I think it’s completely incomparable.”
The Chinese Communist Party throws a wind-up ball to see how Biden will take it
Thorpe believes that the Chinese Communist Party has thrown out the Foreign Investment Review Measures as a wind ball and a tester. The Chinese Communist Party will first observe how the U.S. government treats Chinese companies in the U.S. If sanctions are strengthened, the Chinese Communist Party will immediately use this bull’s-eye to strike; even if it slows down, it will still keep using this stick to test the bottom line of the U.S. side by side, and the Chinese Communist Party will not soften to pursue peace. Thorpe said this approach is a “paper tiger” at first, but will slowly become real. Whether the Biden Administration hardens or softens, the CCP will use this approach to snare the U.S. regime.
Thorpe believes that the Chinese Communist Party has already made a step forward, and it is up to the Biden administration to take the next step. Biden said in an exclusive interview with CBS News on Feb. 7 that there will be fierce competition between the U.S. and China, but stressed that it will not be the same as Trump’s approach, whether this means that the policy on huawei and SMIC will be relaxed. This tests the Biden administration’s actions and is the focus of U.S.-China relations observation.
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