WASHINGTON (BLOOMBERG) - The US Treasury Department is planning to heighten scrutiny of Chinese investments in sensitive US industries under an emergency law, putting Washington's trade war with Beijing on a potentially irreversible course.
Under the plan, the White House would use one of the most significant legal measures available to declare China's investment in US companies involved in technologies such as new-energy vehicles, robotics and aerospace a threat to economic and national security, according to eight people familiar with the plans.
Treasury Secretary Steven Mnuchin, in a report scheduled to be released on Friday (June 29), will suggest administering that law through an inter-agency government panel called the Committee on Foreign Investments in the US, or CFIUS, the people said, requesting anonymity to discuss the plans.
One concept under review would be to create a two-tracked CFIUS process to review investments, with one specifically for China, two of the people said. A Treasury spokesman did not immediately reply to a request for comment.
China’s Ministry of Commerce did not immediately respond to Bloomberg’s inquiry about the report of planned investment curbs from the US.
At a regular briefing in Beijing on Monday (June 25), foreign ministry spokesman Geng Shuang said China wants the US to treat commercial activities objectively and pointed out that Chinese investment has created a lot of jobs and tax income in the U.S.
"It is now clear that Trump's policy is not about the trade deficit," said Raymond Yeung, chief greater China economist for Australia & New Zealand Banking Group Ltd in Hong Kong. "Security risks can be applied to every aspect in a bilateral relationship, investment restrictions in particular."
Stocks fell in Asia with U.S. equity-index futures and the yen advanced as investors assessed prospects for continuing trade tensions.
Mnuchin has been working on the plans since as early as December, though he has argued for taking a less aggressive approach, the people said. In the end, he has been persuaded by other members of the Cabinet and the president to use blunt tools to address growing national security risks from Chinese investments, the people said.
The Treasury chief has kept a low profile in recent weeks. People familiar with Mnuchin's thinking said that after he lost an internal battle on how to handle the trade dispute with Beijing, he's signalling his disagreement with the president's approach through silence.
Some administration officials are concerned that declaring a national economic emergency could hammer the stock market or hurt US firms operating in China, they said.
The South China Morning Post reported on Sunday (June 24) that China has no plan to target US companies operating in the nation amid escalating trade tensions, but additional steps by the White House may change that assessment.
Following talks on Monday in Beijing, Vice Premier Liu He – President Xi Jinping’s top economic adviser – said China and the European Union had agreed to defend the multilateral trading system. They vowed to oppose protectionism and unilateralism, saying those actions could push the world into recession in an apparent rebuke to the US.
The national emergency law, called the International Emergency Economic Powers Act of 1977, will target prospective investments, meaning existing ones cannot be undone, according to four of the people. It is unclear what would happen to deals that have been announced but not yet completed. Treasury officials are trying to settle on legal definition of "Chinese entities'' that would be affected.
The Treasury Department is working on rules to block firms with at least 25 per cent Chinese ownership from buying companies with “industrially significant technology”, the Wall Street Journal reported, citing people familiar with the plans. The final limit may end up lower than that, and the administration is also working on export controls to stop US technology being exported to China, the people said.
Trump's top trade adviser, Peter Navarro, has been laying the groundwork to escalate what he's so far called a "trade dispute.'' Navarro recently issued a 36-page report on "How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World."
The report is seen as part of the evidence the administration will use to justify the investment curbs on economic security grounds.
Much of China's "behaviour constitutes an economic aggression,'' Navarro said during a phone briefing with reporters. "It is critical both for the interests of the United States as well as for the integrity and proper functioning of the global economy that the Chinese cease these kinds of behaviours.''
Treasury's move is part of the Trump administration's actions taken under Section 301 to respond to China's alleged theft of US intellectual property and follows rounds of tit-for-tat tariff threats between the two largest economies.
The IEEPA statute allows the president to unilaterally impose the investment limits. Congress, in parallel, is working on reform legislation to the CFIUS. That would scrutinise inbound investment in the US on national security grounds.
People familiar with the administration's plans said the Treasury's investment limits are seen as complementing the CFIUS reform efforts, which are not only focused on China and do not limit investments on economic security grounds.
The people briefed on the latest action said the Treasury limits will be rolled out in phases, meaning not all Made in China 2025 sectors will be covered at once.