I recently returned from the Milken Institute Global Conference in Los Angeles, where senior executives of global asset allocators gathered to discuss a range of issues — from geopolitics to the global financial system, philanthropy to venture capital, and China-U.S. relations to the future of democracy. For three days, the Beverly Hilton became a beehive of discussion for some of the world’s most challenging, provocative and consequential questions.
As a Chinese person donning a speaker’s badge, the bulk of my chats with people began and ended with questions about China and its investability. I found many U.S. limited partners were concerned about U.S. President Joe Biden’s proposed executive order to prohibit U.S. capital from investing in certain technology sectors in China, better known as “reverse CFIUS.” This topic dominated discussions about China-U.S. relations throughout the conference.
For those unfamiliar with CFIUS, it is a U.S. government interagency committee that reviews foreign investments in the U.S. through the lens of national security. For example, in 2017, CFIUS rejected a Beijing-sponsored consortium’s bid to acquire Xcerra Corp., a U.S. semiconductor testing and handling provider, based on national security concerns. Similarly, in 2012, President Barack Obama rejected China’s heavy-machinery maker Sany Group Co. Ltd.’s purchase of a wind farm company in the state of Oregon, due to the proximity of one its assets to a naval base.
Reverse CFIUS, on the other hand, would be a new interagency committee for reviewing U.S. outbound investments for national security purposes, specifically with China in mind. Initially proposed during the pandemic over rising supply chain fears, this new mechanism aims to “prevent strategic competitors from exploiting investments and expertise in ways that threaten our national security.” The unprecedented restriction on outbound U.S. investment in foreign countries, especially in China, would mark a pivotal turning point for American investors.
However, policy details remain unknown, and anxious U.S. investors continue to ask questions:
1. Will this review only focus on specific industries? How will they be defined?
2. What kind of investments would be subject to review? Private market or public market investments, or both?
3. Will reviews only focus on future investments, or will retrospective reviews be required?
4. What about portfolios deemed a future security threat contain investments made years ago?
It has been widely reported that semiconductors, artificial intelligence (AI), quantum computing, biotechnology and clean tech are all on the banned list. Without getting into the legal and finance technicalities, obvious complications have already surfaced — AI is far too general and covers myriad subsectors.
Beijing is also concerned about reverse CFIUS, given that U.S. capital has been the primary source of funding for China’s tech industries. However, if U.S. investment in China is restricted, EU’s technology and investments may provide a substitute. Therefore, the EU’s neutral stance on U.S. policy headwinds, including reverse CFIUS, lies at the heart of Beijing’s recent diplomatic efforts, exemplified by its charm offensive toward EU leaders such as French President Emmanuel Macron.
So who are the victims here? China’s tech sector? Not quite. Capital vacancies can be backfilled by the rest of the world — the EU, Middle East, even Japan and South Korea.
The true victims are U.S. investors.
Major American asset allocators expressed deep concern over their exclusion from China’s future growth, focusing more on the implications of China-U.S. tensions than on China’s economic recovery. They have confidence in China’s market and its future growth.
This confidence is also reflected within China. On April 30, the Politburo, China’s top policymaking body, reviewed the first quarter economic performance and chose not to pursue any stimulus plan. Thus far, the recovery has exceeded Beijing’s expectations.
Many U.S. investors lament that they are being forced into a disadvantageous position. Beijing’s countermeasures would further hinder U.S. investors’ opportunities in China, accelerating the downward spiral of the world’s most important bilateral relationship.
Unfortunately, reverse CFIUS is not an isolated measure, but a reflection and microcosm of the widening rift in China-U.S. relations. It is one of the many decoupling policies implemented by the U.S. government that has upended a longstanding global economic narrative. For 20 years, robust global economic growth has been supported by several factors: stable China-U.S. relations, China’s entry into the World Trade Organization (WTO), cheap oil and gas from Russia to Europe, China’s manufacturing capabilities, and U.S. consumers’ purchasing power.
As of 2023, most of these factors have vanished.
In what appears to be buyer’s remorse, the U.S. government is now grappling with the reality that the WTO membership and other beneficial policies extended to China did not reform China’s regime as intended, but instead gave rise to a formidable economic adversary.
Despite this, many investors expressed skepticism that containment policies like reverse CFIUS would have any meaningful effect on China’s development in the future. China’s economy will continue to grow along Beijing’s preferences, fueled by the desires of the Chinese people to elevate their living standards through economic growth. In China, pursuing prosperity is a deep-seated drive that is easy to see — from people taking triple shifts at work to customary greetings involving the God of Fortune during the Lunar New Year, grinding for growth is assumed.
Ideally, U.S. politicians and lawmakers would develop a 20-year policymaking perspective focused on how to co-exist and co-lead the world with a China led by the Chinese Communist Party, despite their ideological impasse and divergence in governance. The real challenge, however, is formulating a long-term approach in a polarized nation where the administration changes every four or eight years.
Nearsighted policies designed to achieve quick wins in the short-term, including reverse CFIUS, do not serve the best interests of the U.S., China, or the rest of the world.
Without question, top U.S. policymakers and leaders understand this. While the Biden administration is aligned on prioritizing national security safeguards over economic affairs, there has been a notable change in tone in recent weeks.
On April 20, U.S. Treasury Secretary Janet Yellen spoke on China-U.S. economic ties, positing that the U.S. is not seeking to decouple its economy from China, and is keen to communicate to work together on tackling shared challenges such as climate change and debt relief. This premise of avoiding decoupling was reiterated less than a week later in a speech on renewing U.S. economic leadership by National Security Advisor Jake Sullivan.
As global investments become increasingly interlinked with foreign affairs, we find that the world’s investment landscape is not merely being influenced by geopolitics, but is being reshaped as geopolitics. Under the new paradigm of the political economy, investors have no choice but to navigate between global investment fundamentals and national policy ambiguities.
For U.S. limited partners and their China fund managers, understanding China-U.S. relations — including China’s regime, stance on Taiwan, and structural policymaking — is no longer just another tool for the investors’ toolbox, but the prerequisite skill for investing in China.
Following a suffocating period of relations between the two countries, global investors are eager to see more stability in this relationship, though it is unclear how China will accept an olive branch from the U.S. The trillion dollar question, however, is how long this stability will last.
Ming Liao is the founding partner of Prospect Avenue Capital, a China tech-focused growth fund. He can be found on LinkedIn and reached at ming.liao@pac.fund.
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