CFIUS and China: The MoneyGram case and beyond

My AEI colleague James Pethokoukis wrote a blistering column last week decrying the Trump administration’s “foolish economic Cold War with China.” The specific object of his ire was the decision to block the sale of MoneyGram, a Dallas-based money transfer company, to Ant Financial, a money transfer company controlled ultimately by Jack Ma, the Chinese tycoon who owns Alibaba.

The MoneyGram logo is seen on a kiosk in New York, U.S. January 3, 2018. REUTERS/Shannon Stapleton

While I agree with the critique of this action and have been in the forefront of attacking Trump’s moves to “stifle trade,” there needs to be additional context added to the MoneyGram decision. First, the Trump administration’s action does not come out of nowhere and is not just another example of this president’s particular folly. Under President Obama, the US had begun to signal a harder line on Chinese investment. Obama blocked the Chinese takeover of a semiconductor company, and just before leaving office directed the indictment of Chinese officials in connection with cyberattacks and theft of intellectual property. Further, with regard to overall Chinese investment and with regard to the MoneyGram deal specifically, there is large and growing bipartisan congressional pressure to clamp down (see below). Congressional critics of the MoneyGram deal have charged (falsely) that vital security information from US military personnel could be compromised with the deal.

Second, while Pethokoukis argues correctly that in this case the financial information required “is about what you hand over when signing up for a fitness gym,” other and larger proposed financial deals may involve much more detailed financial information — for instance, Chinese companies’ takeover deals encompassing investment planning, insurance, hedge funds, or commercial mortgage lending. Indeed, there are several more complicated financial services cases now pending before The Committee on Foreign Investment in the United States (CFIUS), including a $2.6 billion bid by the Chinese company Oceanwide Holdings for the insurer Genworth Financial Inc., and the purchase of the US hedge fund SkyBridge Capital LLC., by the Chinese firm, HNA Group.

Further, these recent events highlight the problems of utilizing the CFIUS process for making new or expanded policy decisions regarding foreign direct investment (FDI) in the US. CFIUS by statute cannot discuss the details behind any of its individual findings and actions. Thus, in this instance and others, we are left in the dark about US policy. What are the boundaries for blocking investments that involve the financial data of US citizens? Do these restrictions apply to all foreign companies — or only to Chinese companies? Beyond the legal technicalities, what are the implications for US efforts to open the closed Chinese financial markets to competition from US and other foreign multinationals? Will reciprocal Chinese personal data regulations also block US companies from establishing a presence in China?

Finally, it should be noted that Congress is moving to create additional potential barriers to future FDI in the US, through new amendments to the CFIUS process. Though Sen. John Cornyn (R-TX) is sincerely committed to an open investment policy for the US, his bill (which is the major legislative vehicle for CFIUS) would greatly expand — and hugely complicate — the criteria by which foreign investment proposals are evaluated. Specifically, the bill will expand potential scrutiny by CFIUS beyond mergers and acquisitions to joint ventures and other commercial arrangements between US and foreign firms. This will result in a huge increase in the number of transactions to be judged, and almost certainly stretch the capabilities of the CFIUS staff beyond its current (and future) competence.

Cornyn’s bill will also represent the first time the US government has undertaken the regulation of outward investment, as opposed to inward investment by foreign companies. The aim is to allow the US government to reach more subtle and sophisticated Chinese investment with US companies, particularly start-ups. The problem (and again as above) with using CFIUS as a vehicle for policy changes is that while aiming at Chinese companies, the reach of CFIUS is far wider. It will have a great impact on the much greater universe of FDI from the real major investors in the US — England, the Netherlands, France, Germany, and Japan are major examples. Congress should carefully weigh the unintended negative consequences of proposed CFIUS changes before taking this momentous step.

James Pethokoukis got it dead right on MoneyGram, but the issues spread far beyond this one action.