Analysis of Chinese Investments in the USA

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Once hardly noticeable, Chinese investments in U.S. companies are now rising sharply. Cumulative Chinese investments in U.S. companies remain modest compared to those of other major countries. However, a combination of “push and pull” factors are moving China’s annual investment levels closer to levels consistent with China’s current economic stature.

First, the Chinese government has made a conscious decision to diversify its foreign currency assets into hard assets. This has led to the creation of sovereign wealth funds that make portfolio investments in U.S. equities, private firms, and real estate.

Second, the Chinese government has altered its policy guidance toward foreign direct investment (FDI). Whereas it previously encouraged investments almost exclusively toward energy and resource acquisition in developing countries, it now also encourages investments in advanced countries. The government’s goals for these investments include securing energy and mineral resources and acquiring advanced technologies in industries where China wishes to leapfrog existing competitors.

Third, U.S. state governments and, to a lesser extent, the federal government are vigorously trying to attract Chinese greenfield investments in the hope of creating jobs and jump-starting local economies.

Fourth, Chinese investments are being drawn to the United States by the availability of financially weak firms, some of which possess potentially useful technologies for China.

Fifth, some firms that are already competitive with U.S. producers are investing to enhance their U.S. market shares or in response to trade remedies proceedings against unfair trade practices, such as Chinese subsidies.

Economic Benefits

On an aggregate basis, the economic benefits of Chinese investments in the United States have been modest. The precise benefit is difficult to measure due to the convoluted ownership structures of many Chinese investments and the time lags in official U.S. data. Still, based on a combination of official and private data, it is reasonable to conclude that jobs in Chinese-owned companies in the United States increased by 10,000 to 20,000 workers during the past five years.

While hardly significant relative to overall U.S. employment and even to jobs in other countries’ U.S. affiliates, any job creation is welcome given continued slackness in the U.S. labor market.

Chinese FDI in U.S. companies has helped stabilize some financially troubled firms. Portfolio investments by sovereign wealth funds also have helped the economy by solidifying the financial system and providing liquidity to certain property markets.

Chinese investments have occurred in all U.S. regions and in many sectors. According to one private data source, they have been especially prominent since 2007 in the Southwest, Great Lakes, Southeast, and Far West regions, and in the fossil fuels and chemicals, industrial machinery, and information technology industries. According to another private source, as well as government data, the financial sector is also a major recipient of Chinese FDI.

Policy Challenges

These welcome, though still modest, economic benefits are counterbalanced by policy challenges tied to Chinese FDI. First, U.S. affiliates of Chinese companies are not pure market actors and may be driven by state goals, not market forces. China’s outward investments are dominated by state-owned and state-controlled enterprises (SOEs). These entities are potentially disruptive because they frequently respond to policies of the Chinese government, which is the ultimate beneficial owner of U.S affiliates of China’s SOEs. Likewise, the government behaves like an owner, providing overall direction to SOE investments, including encouragement on where to invest, in what industries, and to what ends.

Second, SOEs may have unfair advantages relative to private firms when competing to purchase U.S. assets. SOEs benefit from substantial subsidies in China and their investments in developing countries also receive ample financial support from the national and sub-national governments, state-owned financial institutions and local governments. Government pronouncements out of China suggest that investments in the United States and other advanced countries will also receive ample financial support. This raises the possibility that Chinese largesse could determine market outcomes for purchases of U.S. businesses.

Third, an increased SOE presence may be harmful to the U.S. economy. In China, SOEs are a major force but as a group they are less efficient and profitable than private firms. To the extent that SOEs purchase U.S. companies on the basis of artificial advantages and operate inefficiently, they may not be beneficial to long-term U.S. economic performance.

Fourth, Chinese investments will create tensions related to economic security and national security if they behave in accordance with China’s industrial policy as articulated in the 12th Five Year Plan, government pronouncements, and official investment guidance. China’s current policy guidance directs firms to obtain leapfrog technologies to create national champions in key emerging industries, while investment guidance encourages technology acquisition, energy security, and export facilitation. Based on this juxtaposition, some will conclude that Chinese FDI in the United States is a potential Trojan horse. Indeed, this study describes three investments in new energy products after which production utilizing the desired technology was shifted to China.
Other Findings

U.S. data collection efforts related to FDI are substantial. However, they likely undercount Chinese FDI due to the complicated ownership structures of many Chinese investments. Moreover, although Chinese-owned companies report their data to the U.S. government, many data points are not publically disclosed due to standard U.S. reporting procedures that protect the identities of individual firms. This issue will resolve itself in the coming years if Chinese FDI grows as expected because limits on disclosure will no longer apply.

The United States is relatively open toward FDI, though there are some sectoral restrictions and a national security review undertaken by the Committee on Foreign Investment in the United States (CFIUS). There are a host of laws that subject foreign investors to rules on antitrust, foreign corrupt practices, and trade in arms and sensitive technology products. However, there is no procedure that explicitly considers issues related to economic security, one of the major concerns about Chinese FDI.

Portfolio investments in equities fall under the purview of the Securities and Exchange Commission (SEC). SEC disclosure requirements and practical considerations make it highly unlikely that Chinese SOEs could successfully collude to accumulate significant equity positions in important U.S. firms.

Reverse mergers offer a back door into U.S. capital markets but are not an effective way to acquire important U.S. assets. Indeed, the target of a reverse merger is typically a shell company devoid of meaningful assets. This technique is typically used by private firms that have difficulty accessing capital in China or by provincial SOEs trying to support restructuring efforts in China. There is no indication that any major SOE has used or plans to use this technique to enter the U.S. capital market.

The Chinese legal and regulatory framework for outward FDI requires approvals by three agencies at sub-national and/or national levels. For SOEs, the primary gatekeeper is the State-owned Assets Supervision and Administration Commission (SASAC), though for some investments approval from the State Council is required. The process is widely considered to be cumbersome and is being reformed to facilitate outward FDI.

 

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Chinese Cyber Hackers Launch Malicious Bot

Chinese Cyber Hackers Launch Malicious Bot

In March 2018, an identified financial services corporation received a thumb drive infected with the bank credential-stealing Qakbot malware variant, targeting information from networked computers and financial institution web sites. The financial services corporation purchased bulk thumb drives from a US online retailer of computer hardware. The thumb drives were originally manufactured in China. According to FBI forensic analysis, the Qakbot malware was on the infected thumb drive before the drive arrived in the United States. Qakbot is extremely persistent and requires removal of all malware from every device. Failure to remove even one node of malware may result in re-infecting previously sanitized systems possibly costing the victim hundreds of thousands of dollars in malware removal and system downtime.

Threat

Qakbot is an information stealing worm—originally discovered in 2007 with a major update in 2017—that propagates through removable drives, network shares, and Web pages. The most common vector of intrusion for Qakbot is malicious attachments to phishing emails. Once executed, Qakbot spreads to other shared folders and uses Server Message Block (SMB) protocol to infect other machines. Qakbot has keylogging capabilities, and is able to propagate across network environments through a single instance within that network. It is capable of remaining on a device through the use of registry keys and by scheduling recurring tasks to run at timed intervals. Every device connected to the network and every piece of removable media which has been attached needs to be scanned for the malware and cleaned of the infection before it can be reconnected. The most recent updates in 2017 allows Qakbot to lock users out of the active directory, preventing them from being able to work. It also deploys malicious executables into network shares, registering them as services.

Cyber actors have the capability to infect devices with malware at nearly any point in the manufacturing process. The FBI has historically seen cases of infection with malware capable of stealing credentials, gathering data on the users of a computer or network, dropping other types of malware, and serving as a “backdoor” into a secure network. It is difficult to know at which point the malware infection occurred or whether the infection was intentional, due to the international nature of hardware manufacturing.

Recommendations

To mitigate the threat of a potentially infected thumb drive, the following measures should be taken at a minimum:

Ensure the use of approved, trusted vendors for hardware purchases.

Scan all hardware, especially removable storage media, on an external system prior to its insertion into a network environment.

For signature-based intrusion detection systems, ensure that the hash value for known Qakbot variants are included. The MD5 value for the variant identified in this PIN was: ff0e3ec80faafd04c9a8b375be77c6b6. This hash value can change, so be prepared to use other advanced detection systems.

Users should protect themselves and organizations by practicing good browsing habits, ensuring they do not respond to or click on unsolicited email, and to not plug unknown USB devices into
their workstations.

If you don’t have the expertise to properly handle or identify potential cyber threats please seek out an expert who can provide the expertise needed to secure your organization.