When Blackstone sold the iconic Waldorf Astoria Hotel in New York to Chinese-owned Anbang Insurance in 2014, along with Strategic Hotels & Resorts, which owned hotels across America, the U.S. private equity firm prudently asked the Committee on Foreign Investment in the U.S. whether it had any objections to the transactions.
It was not clear why CFIUS, a regulator that is supposed to rule on deals that pose a national security threat, might object to a foreign entity purchasing U.S. hotels, even though the Waldorf had often played host to U.S. presidents. But while CFIUS gave its assent to the sale of the Waldorf, it blocked the purchase of another hotel, citing its proximity to a military base hundreds of meters away.
At the time, the Blackstone submission was voluntary. But under new rules signed into law by President Donald Trump on Aug. 13, such submissions have become mandatory. Moreover, CFIUS has just received authority to charge for its reviews of proposed deals. In addition, the U.S. Congress has also allocated $20 million each year for the next few years to help cover the committee's expenses. The changes give it an incentive to be far more intrusive than the old regime, lawyers in Washington say.
While many observers outside the U.S. view the changes as a Republican party initiative originating in the White House, the legislation had broad bipartisan support. For example, Senator Charles Schumer, a Democrat whose constituency includes Wall Street, was a big supporter. That consensus suggests that this U.S. retreat from globalization is not something that will pass when the U.S. midterm elections in early November are over.
The "new" CFIUS codifies practices which had already crept in under previous rules. But it also vastly expands CFIUS's power to define what constitutes a threat to national security. And there is nothing that prevents it from applying its judgement in a selective fashion.
Lawyers say that the new regime's biggest impact will be on the flow of capital from China to the U.S. "Although the ... substantive provisions mention no country by name, both the text and the subtext suggest that Congress intended to target Chinese investments in the U.S. technology sector and responded to the conviction among at least portions of the U.S. national security community that some Chinese investors structure their investments to evade CFIUS's jurisdiction," the New York-based law firm Davis Polk & Wardwell said in a review.
The changes will have an especially dramatic impact on U.S. funds with Chinese investors. "An otherwise U.S. private equity fund's investments in U.S. businesses may be subject to CFIUS jurisdiction by virtue of foreign limited partners' participation in the fund's decision making, receipt of certain information about investments and/or other factors," said Kirkland & Ellis, another U.S. law firm.
This means that if a passive Chinese investor puts money into a U.S. fund doing U.S. deals and receives anything more than basic financial information about a prospective investment in the U.S, that transaction could be subject to CFIUS review and a possible veto, as if the fund itself was foreign.
The changes will likely resonate well beyond the U.S. Many jurisdictions in Europe are also strengthening their legal or administrative regimes for reviewing foreign investments, and others such as Israel are being encouraged to do so by the U.S. Israeli engineers are among the world's best in the application of military and civilian technologies, and Israeli technology companies have drawn ever closer to China in recent years.
The move to a tougher CFIUS regime will therefore lead to a retreat from globalization not just for the U.S. but for many other countries as well. It is not yet clear how traditional American allies such as Australia, Japan, and South Korea will respond to the U.S. measures, which may have a direct or indirect impact on them. But it is clear that they will face difficult decisions as deglobalization pressures intensify.
Henny Sender is the Financial Times' chief correspondent for international finance, based in Hong Kong, and contributes occasional columns to the Nikkei Asian Review.