This is the first of what I hope will be many blog posts focused on the blossoming economic ties between Israel and China. If you live in Israel, you probably already know that, increasingly, China has become an important partner for the Israeli business community though if you live in the US, China, or anywhere else, that might be news to you. It’s my hope that this blog will contribute to a deeper understanding of the interests, benefits and, yes, risks for Israel and China of strengthening the links between the world’s largest nation and one its smallest.
At first glance, the sale of US money transfer service provider MoneyGram International to China’s Ant Financial looked like a win-win proposition for all involved. MoneyGram’s shareholders would receive $1.2bn in cash, which represented a substantial premium over its market cap, while Ant Financial, a Chinese financial services giant controlled by Alibaba founder Jack Ma, would gain an international presence at the same time as it faces intense competition at home from the WeChat platform of rival Chinese internet company, Tencent Holdings. So it came as something of a surprise when on January 2nd Ant and MoneyGram announced that they were calling off the deal due to their inability to obtain CFIUS approval for the transaction. But for people who closely follow US – China relations and particularly US concerns about Chinese investment, it wasn’t that big of a surprise. The obvious questions raised by the failure of the Ant-MoneyGram merger are: What is CFIUS? Why wasn’t the merger approved and how does that fit with broader picture of CFIUS’s impact on Chinese investments in the US? And what does it mean for Israel?
What is CFIUS?
CFIUS is an acronym for the Committee on Foreign Investment in the United States and is an inter-agency committee which has the power to conduct national security reviews of transactions which could result in foreign control of a US business. Chaired by the Secretary of the Treasury, CFIUS includes representatives from 16 US government agencies, including the departments of Defense, State, Commerce and Homeland Security. CFIUS has the power to impose risk mitigation conditions on transactions that fall under its purview and can refer a transaction to the president who is authorized to block it. While it’s rare for presidents to block deals (it’s happened only 4 times), the parties to a proposed transaction will often terminate the deal if they come to the realization that the transaction will not be approved, as appears to have been the case with the Ant – MoneyGram merger.
Why Wasn’t the Ant-MoneyGram Merger Approved by CFIUS and how Does that Fit With the Broader Picture of CFIUS’s Impact on Chinese Investments in the US?
While we don’t know CFIUS’s specific concerns about the merger, we do know that the scope of what are considered national security concerns raised by foreign investment generally, and Chinese investment in particular, is expanding. The financial services sector and money remittal services raise questions about money laundering and terror financing. In addition, the acquisition of MoneyGram raised the specter of Chinese access to sensitive personal consumer data of US citizens including members of the military and national security apparatus. Both of those factors appear to have informed the committee’s concerns about the deal. And while in a different political environment, CFIUS may have addressed those concerns through its power to impose conditions on the transaction, the current atmosphere of anxiety about China may have made that a political non-starter.
The failure of the Ant-MoneyGram merger joins a growing list of proposed Chinese acquisitions in the US that have either been blocked by the president, such as the $1.3 billion acquisition of US chip maker Lattice Semiconductor by China-backed buyout fund Canyon Bridge Capital Partners, or were abandoned by the parties due to CFIUS concerns as was the case with the failed acquisition of 10% of digital mapping company HERE by a group led by China’s Tencent and Navinfo, and the failed $1.4 billion acquisition of US AppLovin by Chinese buyout firm Orient Hontai Capital.
While President Trump has made no secret of his hardline attitude to trade in general, and trade with China in particular, increased CFIUS scrutiny of Chinese investment cannot be attributed to Trump alone. Increasingly, American policy makers are expanding their view of how national security is effected by foreign investment to include potential threats to America’s long-term technological leadership in addition to more traditional concerns relating to weapons systems and dual use technologies. And as China is increasingly perceived as a strategic adversary to the US both in terms of military might and technological leadership, the US government is becoming progressively more uneasy about Chinese investment in the American economy. During 2017 new legislation was introduced in Congress to expand the powers of CFIUS to oversee transactions that are not currently within its purview including joint ventures and non-control investments in certain cases. Looking ahead, it seems clear that Chinese investments in the US will be subjected to ever increasing scrutiny.
The question of whether CFIUS approval will be granted adds significant uncertainty to any proposed Chinese investment in the US and, as is well known, uncertainty is not conducive to successful deals. To make matters worse, there’s generally no authoritative way to know how CFIUS will view a proposed investment until after the parties have expended significant time and resources on negotiating a transaction. The deal risk caused by CFIUS is likely to have a chilling effect on Chinese investment in the US.
What Does it Mean for China-Israel Business Relations?
Simply put, Israeli law does not include anything remotely similar to CFIUS. Furthermore, the Israeli government has made it abundantly clear that it is interested in broadening Israel’s economic ties with China and that it welcomes Chinese investment in Israel. Chinese investment in Israel has grown exponentially in recent years as can be seen by ChemChina’s $2.4bn acquisition of Adama and BrightFood’s acquisition of Tnuva for over $1bn in addition to many smaller deals which receive less press attention but play an important role in Israel’s economy. Chinese firms also play a leading role in many of Israel’s most important infrastructure projects such as the new Ashdod port and the Tel Aviv light rail project.
While its certainly true that a number of Chinese attempts to purchase Israeli insurance companies have been unsuccessful due to concerns about regulatory approval, that should be seen in the narrow context of the financial services industry regulation and does not mean that Chinese investment is not welcome in Israel. The legal basis for requiring regulatory approval for those transactions differs substantially from the laws that empower CFIUS in the US. Israeli law does not grant the government blanket powers to block foreign investment. Rather, there are specific industries such as the insurance and banking sectors where regulatory approval is required but where specific legislation does not exist government approval is not required. That having been said, it is worth noting that barriers may exist to transferring Israeli technology to China even after the company that developed that technology has been bought by Chinese investors. Israel’s export control regime would come into play if a Chinese owned Israeli company sought to transfer military or dual-use technologies to China and, in light of Israel’s close security relationship with the US, it is safe to assume that US security concerns would play a significant role in the Israeli government’s review of such a transfer.
The synergy between China and Israel, primarily in the tech sector, are glaringly obvious and well known in the business sectors in both countries. As Chinese companies become increasingly wary of the potential impact of CFIUS on their international investment strategies, they would do well to consider investing in Israel as an alternative to the US.
Author’s note: after writing this post it came out that the Israeli Antitrust Authority is looking into the participation of Chinese companies in infrastructure projects… more on that in my next post.