IV. Outbound Investment A. Introduction

Over the past decade, China’s outbound foreign direct investment (OFDI) has grown at a rapid rate.327 A longstanding focus of China’s OFDI has been the acquisition of mineral deposits and other natural resource assets, principally in developing regions such as Africa and Latin America.328 Yet, as China’s OFDI flows have increased, technology-focused investments have become more prevalent, particularly in the United States and Europe.329

Various motives inform China’s outbound investment behavior. Under the general, market- based theory of foreign direct investment (FDI), foreign investors seek (1) market expansion, (2) efficiency gains, and/or (3) resources (broadly defined to include natural resources and other strategic assets).330 These motives also apply to an extent in China’s case, particularly with respect to natural resource investments that aim to mitigate China’s reliance on resource imports.331

327 Thilo Hanneman, Daniel H. Rosen, RHODIUM GROUP, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 6 (Dec. 2016) (stating that, “The rapid growth of outbound foreign direct investment (FDI) by firms from China is changing the patterns of global capital flows. Chinese FDI flows grew at an average annual rate of 27 percent over the past decade, from $3 billion in 2005 to $123 billion in 2015.”). For a definition of FDI, see Shun Chiao Chang, The Determinants and Motivations of China’s Outward Foreign Direct Investment: A Spatial Gravity Model Approach, 43 GLOBAL ECON. REV. 260 (2014) (“‘Foreign direct investment’ is the category of international investment that reflects the objective of a resident entity in one economy (‘direct investor’ or parent enterprise) to obtain a ‘lasting interest’ and control in an enterprise resident in another economy (‘direct investment enterprise’. The two criteria incorporated in the notion of a ‘lasting interest’ are the existence of a long-term relationship between the direct investor and the enterprise, and the significant degree of influence that gives the direct investor an effective voice in the management of the enterprise.”).

328 See, e.g., Ernst & Young data for the period 2010-2014 shows that Chinese firms transacted a total of 223 M&A deals in energy and mining, totaling $143 billion, and 54 M&A deals in agribusiness and food, totaling $16.7 billion. ERNST &YOUNG, RIDING THE SILK ROAD: CHINA SEES OUTBOUND INVESTMENT BOOM 7-11 (Mar. 2015).
329 Thilo Hanneman, Daniel H. Rosen, RHODIUM GROUP, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 6 (Dec. 2016) (stating that, “Initially focused on extractive sectors in developing countries, today Chinese FDI flows increasingly to advanced economies where technology, brands, and sophisticated manufacturing assets are abundant.”); see also ERNST & YOUNG, RIDING THE SILK ROAD: CHINA SEES OUTBOUND INVESTMENT BOOM 7-11, 15-16 (Mar. 2015) (“European countries, especially the developed ones, are increasingly sought after by Chinese investors for their advanced technology and expertise, well-accepted and recognized brands and mature marketing networks. […] The industrial, [technology, media, and telecommunications] and automotive sectors are favorites for Chinese investors.”).

330 For a general theory of FDI motives (often referred to as the “eclectic paradigm”), The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions J. OF INT’L BUS. STUDIES 1-31 (1988).
331 Yi Zhang, Hein Roelfsema, Unravelling the Complex Motivations behind China’s Outward FDI, 19 J. OF THE ASIA PACIFIC ECONOMY 92 (2013) (“The third pattern is that host country resources, including natural resources and strategic assets, are of growing importance in attracting China’s outward FDI. Many Chinese firms specialize in mass production which involves natural resource intensive processes. Nevertheless, natural resources per capita in China are only 20 percent–25 percent of the world’s average level (Guo, 1996). To secure supplies for domestic firms, the outward FDI has been used to acquire scarce natural resources such as energy, petroleum, and minerals (Wu and Sia 2002). For example, over years Chinese multinationals have invested in large projects to exploit oil in countries such as Algeria, Angola, Kenya, Nigeria, and Sudan; copper in Congo and Zambia, as well as iron ore in Gabon. With the fast expansion of the Chinese economy, in recent years there is an increasing demand for natural resources to support domestic economic growth. This path thereby leads to a more urgent need for conducting

John H. Dunning,

, 19

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But as numerous studies have noted, China’s OFDI is also driven by non-market factors. These factors stem from the Chinese government’s extensive intervention – in the Chinese economy in general, and in foreign investment in particular – to achieve industrial policy objectives.

•   The U.S. Chamber of Commerce observed in a 2017 report:

  In several [Made in China 2025] sectors, the technological gap between domestic and foreign competitors is significant, and closing that gap would require extended timelines and high levels of financial commitment that could stress budgets. To accelerate the learning process, the [Chinese] state appears to be supporting acquisition strategies of Chinese state-owned and state-supported companies tied to [Made in China 2025] priority sectors.332

•   The European Union Chamber of Commerce in China states in a 2017 report:

  Over the course of 2015 and 2016, an unprecedented wave of outbound investments into firms in Europe and elsewhere in industries of relevance to [Made in China 2025] have either been successfully completed or attempted. Significantly, many of these investments have been in areas where European business is unable to make equivalent investments in China, and have also enabled Chinese firms to access technology, brands and management expertise that they would not otherwise have been able to acquire. In some industries, such as semiconductors, attempted and completed investments have spanned entire industrial supply chains.333

•   The 2017 European Commission report on Chinese economic distortions states:

  A clear acceleration of Chinese outbound investments in Europe (and elsewhere) is noticeable in the last few years […] Most of these overseas acquisitions have the direct backing of the State. Through that state-support process, Chinese [state-owned enterprises (SOEs)] gain market share, build additional capacities [and] capital assets and gain access to inputs.334

•   The Mercator Institute for China Studies, a leading German think tank, states in a 2016 report:

  natural-resource-seeking FDI over time.”). See also Shun Chiao Chang, The Determinants and Motivations of China’s Outward Foreign Direct Investment: A Spatial Gravity Model Approach, 43 GLOBAL ECON. REV. 244, 260 (2014). The study, which reviews China’s outbound investment in 138 countries between 2003 and 2009, finds that the “fuel extraction motive plays a key role in China’s OFDI.”
  332 U.S. CHAMBER OF COMMERCE [hereinafter “U.S. Chamber”], MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 22 (2017).
  333 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA [hereinafter “E.U. Chamber”], CHINA MANUFACTURING 2025: PUTTING INDUSTRIAL POLICY AHEAD OF MARKET FORCES 18-19 (2017).
  334 EUROPEAN COMMISSION, COMMISSION STAFF WORKING DOCUMENT ON SIGNIFICANT DISTORTIONS IN THE ECONOMY OF THE PEOPLE’S REPUBLIC OF CHINA FOR THE PURPOSES OF TRADE DEFENCE INVESTIGATIONS 426 (SWD(2017)483 final/2 (Dec. 20, 2012).

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Outbound Investment







[To] speed up China’s technological catch-up and to leapfrog stages of technological development, Chinese companies are acquiring core technologies through investment abroad. In itself, this is neither surprising nor objectionable. However, China’s technology acquisitions are partly supported and guided by the state. China pursues an outbound industrial policy with government capital and highly opaque investor networks to facilitate high-tech acquisitions abroad. This undermines the principles of fair competition: China’s state-led economic system is exploiting the openness of market economies in Europe and the United States. Chinese high-tech investments need to be interpreted as building blocks of an overarching political programme. It aims to systematically acquire cutting-edge technology and generate large-scale technology transfer.335

Rhodium Group, in a 2016 study on Chinese investment in the United States, observes that, while it is difficult to draw clear-cut conclusions concerning aggregate FDI data, “Chinese government policies are important variables in FDI patterns,” and that “the surge in global takeover offers in the semiconductor industry is the most notable example of the industrial policy-outbound investment nexus.”336

Ernst and Young, in a 2016 annual report on China’s outbound investment, states that “[t]he Chinese government is actively improving the strategy of outbound investment to facilitate Chinese enterprises to ‘Go Global’ by launching fiscal and financial support policies and establishing cooperation platforms.”337

Numerous academic studies note the significance of state involvement in shaping China’s OFDI.338 For example, in a widely-cited study on the determinants of China’s outbound

335 Jost Wübbeke, et. al., MERCATOR INSTITUTE FOR CHINA STUDIES [hereinafter “MERICS”], MADE IN CHINA 2025: THE MAKING OF A HIGH-TECH SUPERPOWER AND CONSEQUENCES FOR INDUSTRIAL COUNTRIES 7-8 (Dec. 2016) (emphasis added).
336 Thilo Hanneman, Daniel H. Rosen, RHODIUM GROUP, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 7 (Dec. 2016) (“Government policies impact patterns in Chinese companies’ outbound investment both indirectly, through economic policy, and directly through incentives and policies aimed at promoting overseas investment in specific industries, technologies, and geographies.”); see also RHODIUM GROUP [hereinafter “Rhodium”], Submission, Section 301 Hearing 4 (Sept. 28, 2017).

337 ERNST & YOUNG, GOING OUT – THE GLOBAL DREAM OF A MANUFACTURING POWER: 2016 CHINA OUTBOUND INVESTMENT OUTLOOK 7 (Mar. 2016) (“In 2015, China began to comprehensively implement its ‘One Belt One Road’ strategy. It also introduced the ‘Made in China 2025’ plan and ‘Guiding Opinions on Promoting International Cooperation in Industrial Capacity and Machinery Manufacturing’, aiming at encouraging the manufacturing industry to ‘Go Global’ and to develop international capacity cooperation. These efforts have already taken some effect: In 2015, Chinese enterprises invested USD 14.8 billion along the Belt and Road territories, up 18.2 percent from 2014; meanwhile the outward FDI from the machinery manufacturing industry has grown by 154.2 percent.”). 338 See, e.g., Alvaro Cuervo-Cazurra et al., Government as Owners: State-owned Multinational Companies, J. OF INT’L BUS. STUDIES (July 9, 2014); Lin Cui, Fuming Jiang, State Ownership Effect on Firms’ FDI Ownership Decisions under Institutional Pressure: A Study of Chinese Outward-Investing Firms, 43 J. OF INT’L BUS. STUDIES 264-284 (2012); Chengqi Wang, et. al., Exploring the Role of Government Involvement in Outward FDI from Emerging Economies, 43 J. OF INT’L BUS. STUDIES 655-676 (2012); Luke Hurst, Comparative Analysis of the Determinants of China’s State-owned Outward Direct Investment in OECD and Non-OECD Countries, 19 CHINA & WORLD ECONOMY 74-91 (2011); Ping Deng, Why Do Chinese Firms Tend to Acquire Strategic Assets in International Expansion, 44 J. OF WORLD BUS. 74-84 (Jan. 2009).

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investment, Peter J. Buckley et al. argue for a “special theory of Chinese [OFDI]” that takes into account the degree to which China’s outbound investment is shaped by soft budget constraints afforded to outbound investors by state-owned financial institutions; pervasive state ownership of outbound investors; 339 and the manner in which the Chinese government exerts control over the outbound investment approval process.340

USTR determines that the Chinese government directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies, to obtain cutting-edge technologies and intellectual property (IP) and generate large-scale technology transfer in industries deemed important by state industrial plans. The role of the state in directing and supporting this outbound investment strategy is pervasive, and evident at multiple levels of government – central, regional, and local. The government has devoted massive amounts of financing to encourage and facilitate outbound investment in areas it deems strategic. In support of this goal, China has enlisted a broad range of actors to support this effort, including SOEs, state-backed funds, government policy banks, and private companies.

This section is structured as follows: Section IV.B provides a review of China’s outbound investment policies, and the various state-owned and state-supported actors that participate in outbound investment. The section considers the government’s principal initiatives to acquire foreign technology, including the “Going Out” strategy, and other levers that the government employs to channel and direct investment, such as its outbound investment approval system.

Section IV.C examines the ways in which this policy framework and approach have impacted Chinese investment in the United States. The section reviews aggregate data on investment flows, followed by a detailed analysis of Chinese acquisitions in seven sectors of the U.S. economy that illustrate China’s acts, policies, and practices: (1) aviation; (2) integrated circuits (IC); (3) information technology (IT) and electronics; (4) biotechnology; (5) industrial machinery and robotics; (6) renewable energy; and (7) automotive. The section ends by analyzing Chinese investment activities that target core innovation drivers for the U.S. economy in technology centers such as Silicon Valley.

Section IV.D provides a summary of findings: China has engaged in acts, policies, and practices that are unreasonable, and that burden U.S. commerce. The market-distorting acts, policies, and

339 Peter J. Buckley et al., Determinants of Chinese Outward Foreign Direct Investment, 38 J. OF INT’L BUS. STUDIES 501 (July 2007) (“Market imperfections may be transformed into ownership advantages by emerging economy firms (Buckley, 2004a). This ability may arise from a number of particular and interrelated imperfections: (1) state-owned (and state-associated) firms may have capital made available to them at below- market rates (e.g., in the form of soft budget constraints) […] (2) inefficient banking systems may make soft loans to potential outward investors, either as policy or through inefficiency […] (3) conglomerate firms may operate an inefficient internal capital market that effectively subsidizes FDI […] There are good grounds for believing that all […] of these imperfections exist in China. State-sponsored soft budget constraints make acquisition by Chinese enterprises a ‘normal’ mode of entering and penetrating a host economy.”).
340 Peter J. Buckley et al., Determinants of Chinese Outward Foreign Direct Investment, 38 J. OF INT’L BUS. STUDIES 503 (July 2007) (“Given the extent of state control of the Chinese economy (Scott, 2002), the institutional environment is likely to have had far-reaching and profound effects on the internationalisation decision of Chinese firms. […] Because various agencies within the state administration have been required to approve each and every outward FDI project from China (pre- dominantly through the control of foreign exchange), this evolution is likely to have influenced strongly the development, strength and orientation of Chinese MNEs.”).

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practices of the Chinese government in technology-focused sectors impose significant costs and risks on U.S. industry. They undermine the ability of U.S technology companies to innovate and adapt, and threaten the long-term competitiveness of U.S. industry.

B. Policy and Regulatory Framework

1. Major Policies to Acquire Foreign Technology

a) The “Going Out” Strategy

A cornerstone of Chinese outbound investment is the “Going Out”341 strategy. This strategy encourages Chinese companies to “go out” and invest abroad, and calls on the government to guide and facilitate this effort. The strategy, as originally conceived, seeks to remove obstacles to outbound investment342 and provide targeted support for specific enterprises and sectors investing abroad.343 This strategy appears to have been first articulated in a 1997 speech by then President Jiang Zemin,344 and was enshrined in the 10th Five-year National Economic and Social Development Plan Outline (2001-2005) (10th Five-year Plan).345 In subsequent statements, the government affirmed the linkage between the “Going Out” strategy and technology acquisition. For example, at the 2004 “International Forum on the Going Out of Chinese Companies,” a high- ranking official from the Ministry of Commerce (MOFCOM) explained that, as one of seven

341 English translation of Chinese term zou chu qu.
342 Peter J. Buckley et al., Determinants of Chinese Outward Foreign Direct Investment, 38 J. OF INT’L BUS. STUDIES 500 (July 2007) (“The process of accelerated outward investment liberalisation and growth can be traced from Deng Xiaoping’s tour of South China in 1992 through to the government-led ‘go global’ (zou chu qu) initiative, which was instigated in 1999. This initiative aims to promote the international competitiveness of Chinese firms by further reducing or eliminating foreign-exchange-related, fiscal and administrative obstacles to international investment (Sauvant, 2005)”).
343 Luke Hurst, Comparative Analysis of the Determinants of China’s State-owned Outward Direct Investment in OECD and Non-OECD Countries, 19 CHINA & WORLD ECONOMY 77 (2011) (“A ‘Go Global’ policy was unveiled in 1999. Its fundamental aim was to encourage ODI to support national exports, with the clear objective of pushing domestic firms to internationalize their activities as a means to acquire strategic resources and expand into foreign markets. The overarching goal was to increase the competitiveness of 180 corporate champions to facilitate their rise as true multinationals and enter the Fortune 500. Firms that were identified benefited from preferential tax concessions and political backing (VanWyk, 2009)”).
344 Jiang Zemin, Former General Secretary of the Communist Party of China, Implement the ‘Drawing In’ and ‘Going Out’ Combined Opening Up Strategy [Chinese] (Dec. 24, 1997), available at http://history.mofcom.gov.cn. 345 10th Five-year National Economic and Social Development Plan Outline (adopted by the NPC on Mar. 15, 2001). The 10th Five-year Plan specifically references the “Going Out” strategy in the context of science and technology development. Part 1, Chapter 1, ¶ 5 states: “Adhere to Reform and Opening Up and progress in
science and technology as the driving force. […] We shall unwaveringly expand Opening Up, and while
actively ‘drawing in’, implement the ‘Going Out’ strategy. Amplify implementing the strategy of scientific education, revitalize science and technology, and foster talent for a prosperous nation.” In furtherance of this
policy, the 10th Five-year Plan calls for the expansion of “areas, pathways, and modes for international
economic and technology cooperation” and encourages enterprises to “utilize foreign knowledge resources, and establish research and development institutions and design centers overseas.” Likewise, the plan calls for a
broad array of support measures to help Chinese companies engage in “multinational operations” to “implement internationalization development” (including outbound investment). The government should assist in several
areas, including financing, insurance, foreign exchange, fiscal policy, laws, information services, and border
entry and exit administration. The plan instructs authorities to “improve corporate governance structures of enterprises with outbound investments,” and standardize supervision and administration of outbound investment (Part 5, Ch. 17, § 4).

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aspects of “Going Out,” enterprises should “set up R&D centers in regions endowed with intensive science and technology” and “intensify international technical exchange and cooperation and improve their innovative capability and technology.”346

As discussed below, several recent policies flow from and support the “Going Out” strategy. For example:

•   The State Council’s Notice on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries calls for supporting the “Going Out” strategy of enterprises in establishing foreign marketing networks and R&D centers to promote IC, software, and IT service exports.347
•   The Next-Generation Artificial Intelligence Development Plan, released in July 2017, calls for a “Going Out” strategy that includes overseas mergers and acquisitions, equity investments, venture capital (VC), and establishment of research and development centers abroad.348
•   The Notice on Issuing “Made in China349 2025” (Made in China 2025 Notice)350 outlines a wide-ranging strategy for harnessing and promoting the acquisition of foreign technology through outbound investment, including “explor[ing] the use of industrial funds, state-owned capital dividends, and other channels to support the ‘Going Out’ of advantageous manufacturing capacity including high-speed rail, power generation equipment, automobiles, and engineering, so as to implement overseas investment acquisitions.”351

  China has also established the “Going Out” strategy as one element of the Introduce, Digest, Absorb, Re-innovate (IDAR) approach to technology assimilation (see Section I.C for further

  346 See Karl Sauvant, New Sources of FDI: The BRICs – Outward FDI from Brazil, Russia, India and China, 6 J. OF WORLD INVESTMENT & TRADE 676-677 (2005) (“First, gradually increasing outward investment and develop overseas processing trade and overseas assembling trade. […] Second, intensifying overseas cooperation of resource development. […] Third, contracting overseas engineering projects. […] The fourth aspect is to carry out overseas agricultural cooperation. […] The fifth aspect is to facilitate overseas science, technology and talent cooperation. Companies are guided to set up R&D centers in regions endowed with intensive science and technology. They should intensify international technical exchange and cooperation and improve their innovative capability and technology. The sixth aspect is to elevate the level of foreign-related labor service cooperation. […] The seventh aspect is to promote cooperation in the field of trade in services.”) (emphasis added).

  347 Notice on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries § 4(21) (State Council, Guo Fa [2011] No. 4, issued Jan. 28, 2011).
  348 State Council Notice on Issuing the Next-Generation of Artificial Intelligence Development Plan (State Council, Guo Fa [2017] No. 35, issued July 8, 2017). For full translation and analysis, see Graham Webster, et al., China’s Plan to ‘Lead in AI: Purpose, Prospects, and Problems, NEW AMERICA CYBERSECURITY INITIATIVE (Aug. 1, 2017), available at https://www.newamerica.org/cybersecurity-initiative/blog/chinas-plan-lead-ai-purpose-prospects-and- problems/.
  349 The literal translation is “China manufacturing”, but “Made in China” is consistent with usage in English- language documents published by China’s official state-run news agency, Xinhua News and with colloquial usage. 350 Notice on Issuing “Made in China 2025” (State Council, Guo Fa [2015] No. 28, issued May 8, 2015). For a more detailed discussion on some of the broader policy goals of Made in China 2025, see Section I.C.
  351 Made in China 2025 Notice § 4, “Strategy Support and Guarantees,” § 4(7), “Further Expand Opening Up of Manufacturing Industries.”

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discussion of IDAR). This link is most clearly articulated in a 2006 document issued pursuant to the National Medium- and Long-Term Science and Technology Development Plan Outline (2006-2020) (MLP),352 and other policies which call on the government to “[g]uide enterprises that possess the conditions to ‘go out.’ Through the establishment of overseas research and development entities, fully utilize foreign science and technology resources, follow and study global advanced technology, and continually enhance the technological development and innovation capacity of Chinese enterprises.”353

b) International Cooperation and International Industrial Capacity

In support of the “Going Out” strategy, China has emphasized the need to promote “international cooperation,” a term that often refers to strategic outbound investments guided by state industrial policy. For example, the Information and Communications Industry Development Plan (2016- 2020),354 released by the Ministry of Industry and Information Technology (MIIT) in December 2016, calls for “continually exploring different modes of overseas cooperation including joint ventures, acquisitions, equity investments, and controlling equity investments.”355 The Formal Announcement of Guidelines for the Development and Promotion of the Integrated Circuit Industry (IC Guidelines),356 released in 2014, calls for domestic IC companies to expand “international cooperation, consolidate international resources, and expand international markets.”357 The Robotics Industry Development Plan (2016-2020) (Robotics Five-year Plan),358 under the heading “expand international exchange and cooperation,” states that the government should “develop international exchange and cooperation” across governments, industry associations, and enterprises, and “encourage enterprises to actively expand overseas markets, and strengthen technology cooperation […]”359

Likewise, China recently has called for “international industrial capacity cooperation,”360 which was conceived as part of the “One-Belt One-Road” initiative launched in 2015.361 This policy

352 Notice on Issuing the National Medium- and Long-Term Science and Technology Development Plan Outline (2006-2020) (State Council, Guo Fa [2005] No. 44, issued Dec. 26, 2005); see also Several Supporting Policies for Implementing the “National Medium- and Long-Term Science and Technology Development Plan Outline (2006- 2020)” (State Council, Guo Fa [2006] No. 6, issued Feb 7, 2006).

353 Several Opinions on Encouraging Technology Introduction and Innovation and Promoting the Transformation of the Growth Mode in Foreign Trade [hereinafter “IDAR Opinions”] § 3(10) (MOFCOM, NDRC, MOST, MOF, GAC, SAT, SIPO, SAFE, Shang Fu Mao Fa [2006] No. 13, issued July 14, 2006).
354 Information and Communications Industry Development Plan (2016-2020) (MIIT, Gong Xin Bu Gui [2016] No. 424, issued Dec. 18, 2016).

355 Information and Communications Industry Development Plan § 3(2)6, “Development Priorities” (emphasis added).
356 Notice on Issuing Guidelines for the Development and Promotion of the Integrated Circuit Industry (State Council, issued June 24, 2014).

357 IC Guidelines § 4(8) (emphasis added).
358 Notice on Issuing Robotics Industry Development Plan (2016-2020) (MIIT, NDRC, MoF, Gong Xin Bu Lian Gui [2016] No. 109, issued Mar. 21, 2016) (emphasis added).
359 Robotics Five-year Plan § 4(6).
360 English translation of Chinese term guoji channeng hezuo.
361 Belt and Road Basics, HONG KONG TRADE DEVELOPMENT COUNCIL, http://beltandroad.hktdc.com/en/belt-and- road-basics (last visited Dec. 6, 2017) (“The Belt and Road Initiative refers to the Silk Road Economic Belt and 21st Century Maritime Silk Road, a significant development strategy launched by the Chinese government with the intention of promoting economic co-operation among countries along the proposed Belt and Road routes. The

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focuses on encouraging outbound investment in manufacturing industries to expand markets for Chinese goods and technologies. In addition, “international industrial capacity cooperation” encompasses possible arrangements by which Chinese companies can obtain technology from foreign entities –including acquisitions, various forms of equity investments, and JVs.

In May 2015, the State Council issued the Guiding Opinion on Promoting International Industrial Capacity and Equipment Manufacturing Cooperation (International Cooperation Opinion),362 which identifies 11 sectors as priorities for international expansion: (1) steel and nonferrous metals, (2) construction materials, (3) rail equipment, (4) power generation and infrastructure, (5) resource development, (6) textiles, (7) automotive, (8) information technology, (9) machinery, (10) aviation, and (11) shipbuilding.363 With respect to information and communications technology (ICT), the measure calls for “[p]romoting innovation upgrading” and “raising […] international competitiveness.”364 To do this, authorities are directed to “[e]ncourage telecoms operating enterprises and Internet enterprises to use methods, including mergers and acquisitions and investments in infrastructure and facilities operations, to ‘Go Out’[…].”365

To facilitate this “Going Out” strategy, the International Cooperation Opinion calls for government support, including preferential financing through: (1) equity investment and other new forms of financing; (2) international use of the Renminbi (hereinafter Chinese Yuan or CNY) to facilitate transactions, with support from the state-owned policy banks Export-Import Bank of China (China Exim) and China Development Bank (CDB); (3) diversified funding sources, including low-cost access to funding through domestic fund-raising and preferential access to foreign exchange funds; (4) increases in equity investment resources through more use of state-backed funds, such as the Silk Road Fund; and, (5) export credit insurance.366

China appears to be implementing the “international industrial capacity cooperation” strategy on a large scale. China Exim has described “international industrial capacity cooperation” as a government policy that has informed its lending for outbound investment projects.367 Likewise, on its online “Going Out” Public Service Platform, MOFCOM manages a website dedicated to “international industrial capacity cooperation.”368 This website regularly publishes “industrial capacity statistical data,” which quantifies the growth of China’s outbound investment in “manufacturing industries” and, within that category, the share of outbound investment in

Initiative has been designed to enhance the orderly free-flow of economic factors and the efficient allocation of resources. It is also intended to further market integration and create a regional economic co-operation framework of benefit to all. The National Development and Reform Commission (NDRC) issued its Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road on 28 March 2015. This outlined the framework, key areas of co-operation and co-operation mechanisms with regard to the Belt and Road Initiative.”). 362 Guiding Opinion on Promoting International Industrial Capacity and Equipment Manufacturing Cooperation (State Council, Guo Fa [2015] No. 30, issued May 13, 2015).
363 International Cooperation Opinion § 3(7-18).
364 International Cooperation Opinion § 3(15).
365 International Cooperation Opinion § 3(15).
366 International Cooperation Opinion § 6(32-36).
367 See EXPORT-IMPORT BANK OF CHINA, ANNUAL REPORT 2016 37 (2016) (“The Bank provided financial services to facilitate China’s major strategic plans, including […] international industrial capacity cooperation.”).
368 “Going Out” Service Platform [Chinese], available at http://fec.mofcom.gov.cn/article/tjgjcnhz/.

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“equipment manufacturing.”369 Moreover, Chinese media reports indicate that China has signed over 30 “international industrial capacity cooperation” agreements370 with foreign countries and launched outbound investments in a wide range of industries in pursuit of this policy.371

2. The Chinese Outbound Investment Approvals System

The Chinese government also exercises control over outbound investment through an investment approval mechanism. As described in more detail below, the government retains considerable ability to influence investment decisions through its use of administrative procedures and foreign exchange controls.

By way of background, until the early 2000s, Chinese outbound investment was relatively rare. The government began to permit inbound FDI only in the 1980s, under the aegis of the “Reform and Opening Up Policy.” In the 1980s and 1990s, China’s outbound investment regime remained highly restrictive. Only a small number of enterprises – mostly SOEs – invested abroad during this period.372

Beginning in 2004, the government relaxed certain restrictions on outbound investment, while formalizing its outbound investment approval system in laws and regulations. An important foundation for this shift was the Administrative License Law of the People’s Republic of China,373 which came into effect on July 1, 2004. The law draws a distinction between a set of items that may be and set of items that may not necessarily be subject to government approval,

369January-October 2017 Statistical Data on Industrial Capacity Cooperation [Chinese], MINISTRY OF COMMERCE (Nov. 23, 2017), http://fec.mofcom.gov.cn/article/tjgjcnhz/tjsj/201711/20171102674823.shtml.
370 Signatories are primarily developing countries, such as Kazakhstan, Egypt, and Brazil. These agreements generally entail cooperation on industrial projects in the foreign country with which China signs the agreement, financed primarily or entirely by China. For example, China and Brazil have established an “industrial capacity cooperation fund” with capital of $20 billion, of which $15 billion is provided by China. Sectors in which the fund will invest include advanced technology, among others. China Has Signed Industrial Capacity Cooperation Agreements with 37 Countries [Chinese], XINHUA NEWS, Sept. 8, 2017, available at http://news.xinhuanet.com/politics/2017-09/08/c_129699618.htm; Press Release, Permanent Secretariat of Form for Economic and Trade Co-operation between China and the Portuguese-Speaking Countries, US$20-Billion Chinese- Backed Fund to Build Brazilian Industry Starts Next Week (May 26, 2017).

371 China Signs International Industrial Capacity Cooperation Agreements with Over 30 Countries [Chinese], PHOENIX NEWS, May 12, 2017, available at http://news.ifeng.com/a/20170512/510838270.shtml. The report states, for example: “In the information technology industry, several solar PV companies have invested in solar PV station infrastructure and developed engineering, procurement, and construction full-package services in locations including the United States, Japan, Europe, South America, and Southeast Asia.”
372 Thilo Hanneman, Daniel H. Rosen, RHODIUM, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 66 (Dec. 2016) (“While China embraced inward foreign direct investment (FDI) to a far greater extent than most developing countries since the 1980s, it long prohibited its firms from investing overseas. For most of the first two decades of China’s economic reform period, Chinese companies were forbidden from investing overseas unless they had direct approval from the government. […] The approval regime was modified several times but outbound FDI remained largely the domain of state-owned trading and technology companies.”); Peter J. Buckley et al., Determinants of Chinese Outward Foreign Direct Investment, 38 J. OF INT’L BUS. STUDIES 500 (July 2007) (“Since 1979, when ODI was formally permitted under the ‘Open Door’ policies, the internationalisation of Chinese firms has been tightly controlled by national and provincial government, either directly, by administrative fiat, or indirectly, via economic policy and other measures designed to advance the economic development agenda (Buckley et al., 2006)”).
373 PRC Administrative License Law (adopted by the NPC on Aug. 27, 2003, effective July 1, 2004).

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and codifies relevant regulatory procedures.374 In conjunction with this law, the State Council released a catalogue of all administrative approval items “absolutely necessary to be retained.”375 Also in July 2004, the State Council released a guiding decision on reforming investment approvals. The document recommends an aggregate reduction in approvals, but also the formulation of long-term economic development plans and investment guidance catalogues to channel investment into areas favored by the government.376 This legal and normative framework continues to inform China’s outbound investment approval system.

Several features of the outbound approval system afford Chinese authorities significant influence over outbound investment flows.

a) Formal Approval Authority

Individual government agencies have authority to approve important items relating to outbound investment:

•   The National Development and Reform Commission (NDRC) has authority to “screen and approve”377 outbound investment projects involving overseas resource extraction or large amounts of foreign exchange, as well as the amount of foreign exchange used for outbound investment.378
•   The State Administration of Foreign Exchange (SAFE), the arm of China’s central bank that administers foreign exchange, has authority to “examine and approve”379 the overseas transfer of foreign exchange for capital projects and to “screen and examine”380 the originating source and the overseas transfer of foreign exchange for overseas investment.381
•   MOFCOM has authority to “examine and approve” the establishment of enterprises overseas and to “examine and approve” participation in foreign contract bidding.382

  374 PRC Administrative License Law, art. 12-14. art. 12 authorizes the government to maintain administrative approvals for a variety of reasons including, inter alia, “special activities that directly bear on national security, public security, macro-economic adjustment and control”; “vocations and trades that provide public services and directly relate to the public interest,”; “important equipment, facilities, products, articles that directly concern public security”; “the establishment of the enterprises or other institutions for which the subject qualifications need to be determined”; “other matters for which administrative licenses may be established in accordance with the laws and regulations”.

  375 Decision on Establishing Administrative License for the Administrative Screening and Approval Items Absolutely Necessary to Be Retained [hereinafter “Approval Items Decision”], (State Council 2004 Order No. 412, issued June 29, 2004, effective July 1, 2004, amended Jan.29, 2009, further amended Aug. 25, 2016).
  376 State Council Decision on Investment System Reform §§ 4(2) (State Council, Guo Fa [2004] No. 20, issued July 16, 2004).

  377 English translation of Chinese term shenpi.
  378 Approval Items Decision, Annex items 1 and 2. 379 English translation of Chinese term hezhun.
  380 English translation of Chinese term shenhe.
  381 Approval Items Decision, Annex items 468, 487. 382 Approval Items Decision, Annex items 188, 191.

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b) The Investment Catalogue

In July 2004, the State Council began to publish the Catalogue of Investment Projects for Government Examination and Approval (Investment Catalogue), which informs both domestic and foreign investment approvals.383 The Investment Catalogue, since updated in 2013, 2014, and 2016, lists government approval requirements for investments in “high and new technology” and nine other sectors of the Chinese economy.384 It also specifies, in a general sense, which type and amount of outbound foreign investment is subject to approval or “filing-for-records” requirements with government departments under the State Council.

The 2016 edition of the Investment Catalogue provides that all outbound investments in “sensitive countries”385 and “sensitive sectors”386 require “examination and approval” by government departments under the State Council, and that all outbound investments “administered by the central government,” as well as all investments by “local enterprises” at or above $300 million, require “filing-for-records”387 with government departments under the State Council.

The 2016 edition also refers to government-issued “development plans,” “industrial policies,” and “technology policies”388 as an “important basis”389 for enterprises engaging in investment projects.390

c) MOFCOM and NDRC Approval Roles

MOFCOM and NDRC maintain separate legal instruments to exercise approval and review authority over outbound investment. MOFCOM exercises its authority pursuant to the Measures on Administering Overseas Investment (2014 MOFCOM Approval Measures).391 The measure provides that investments in “sensitive countries” and “sensitive sectors” require “examination and approval” by MOFCOM.392 All other investments are subject to “filing-for-records” requirements,393 which involve the submission of a form and corresponding paperwork. Upon

383 The first edition of the Investment Catalogue was appended to the State Council Decision on Investment System Reform (State Council, Guo Fa [2004] No. 20, issued July 16, 2004). State Council Decision on Investment System Reform § 3(1), also contains a notable provision that grants broad authority to maintain “government investment” in areas that affect “national security” or “fill gaps left by the market,” to expressly include “promoting science and technology advances and the industrialization of high and new technology.”

384 The 11 sectors are: (1) Agriculture and irrigation, (2) energy (3) transportation (4) IT industry (5) raw materials (6) machinery manufacturing (7) light industry and tobacco (8) high and new technology (9) urban construction (10) public services, (11) finance, (12) inbound FDI, and (13) OFDI.
385 English translation of Chinese term mingan guojia.

386 English translation of Chinese term mingan hangye.
387 English translation of Chinese term bei’an.
388 English translation of Chinese term jishu zhengce.
389 English translation of Chinese term zhongyao yiju.
390 State Council Notice on Issuing the Investment Projects for Government Examination and Approval (2016 Edition) §§ 2, 3 (State Council, Go Fa [2016] No. 72, issued Dec.12, 2016).

391 Measures on Administering Overseas Investment (MOFCOM, Shang Wu Bu Ling [2014] Order No. 3, issued Sept. 6, 2014).
392 2014 MOFCOM Approval Measures, art. 6.
393 2014 MOFCOM Approval Measures, art. 6.

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MOFCOM review, the information submitted is “filed for records,” combined with the issuance of a certificate to the enterprise.394 MOFCOM can choose to reject a “filing-for-records” submission if it deems the information to be “untruthful”395 or “incomplete.”396 These administrative procedures are significant because they allow MOFCOM to collect detailed information on and intervene administratively in individual investment transactions.

Pursuant to the Measures on the Administration of Examination and Approval and Filing-for- Records of Overseas Investment Projects (2014 NDRC Approval Measures),397 effective through February 2018, NDRC examines and approves investments that (1) exceed $1 billion in value or (2) involve “sensitive countries” or “sensitive sectors.” For investments at or above $2 billion that are also in “sensitive countries” or “sensitive sectors,” State Council approval is required.398 The 2014 NDRC Approval Measures list “conformity with […] industrial policies” as one of several “examination and approval” criteria.399 All other investments are “filed-for-records” with NDRC at the central level (for all investments by central SOEs and for investments at or above $300 million for all other enterprises) or the local level (below $300 million).400 Like MOFCOM, NDRC performs an administrative evaluation of investments that are “filed for records,” and its criteria include conformity with “industrial policies.”401

Effective March 1, 2018, the 2014 NDRC Approval Measures were replaced by the Measures on the Administration of Enterprise Outbound Investment (2018 NDRC Approval Measures), which adjust but do not fundamentally alter the existing regulations.402 NDRC will only “examine and approve” investments in “sensitive countries” or “sensitive sectors;” yet, in other respects, the new rules are more stringent. In particular, NDRC will now regulate not only outbound investments of People’s Republic of China (PRC)-registered enterprises, but also those overseas investments that are made by foreign entities that are ultimately “controlled” by PRC-registered

394 2014 MOFCOM Approval Measures, art. 9.
395 English translation of Chinese term bu rushi.
396 2014 MOFCOM Approval Measures, art. 9. English translation of Chinese term bu wanzheng.
397 Measures on the Administration of Examination and Approval and Filing-for-Records of Overseas Investment Projects (NDRC, 2014 Order No. 9, issued Apr. 8, 2014).
398 2014 NDRC Approval Measures, art. 7.
399 2014 NDRC Approval Measures, art. 18(1).
400 2014 NDRC Approval Measures, art. 8.
401 In particular, art. 22 of the 2014 NDRC Approval Measures provides: “For outbound investment projects applying for filing for records, NDRC performs screening and examination mainly with respect to whether the project belongs within the administrative scope of filing for records, conforms with relevant laws and regulations, industrial policies, and outbound investment policies […] harms national sovereignty, security, or the public interest, and whether the investment entity possesses the corresponding investment capacity.” 2014 NDRC Approval Measures, art. 22. See also arts. 20, 21, 23.
402 Measures on the Administration of Enterprise Outbound Investment (NDRC, Order No. 11, issued Dec. 26, 2017, effective Mar. 1, 2018). Also in December 2017, NDRC and other government authorities jointly released a notice establishing behavioral norms for “private enterprises” (minying qiye) investing abroad. This measure provides, for example, that private enterprises are to participate in the “One Belt One Road” initiative, promote international industrial capacity and equipment manufacturing cooperation, act in the interest of the Chinese government’s supply side structural reform agenda, and help “protect China’s sovereignty (guojia zhuquan), security (guojia anquan), and public interest (shehui gonggong liyi).” Notice on Issuing Behavioral Norms for Private Enterprise Foreign Investment Operations § 1(2), § 3(18) (NDRC, MOFCOM, PBOC, Ministry of Foreign Affairs, and All-China Federation of Industry and Commerce, Fa Gai Wai Zi [2017] No. 2050, issued Dec. 6, 2017).

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enterprises.403 Moreover, NDRC will evaluate investments based on conformity with the “national interest”404 and “national security”405 (see below).

d) “National Security,”, “National Interest,” and “Sensitive Sectors”

The Chinese government uses expansive definitions of “national security,” “national interest,” and “sensitive sectors” that leaves considerable discretion to government authorities when making outbound investment approval decisions.

The 2018 NDRC Approval Measures, effective March 1, 2018, provide that outbound investment “must not threaten or harm our country’s national interest and national security,”406 and instruct NDRC to supervise outbound investment based on “protecting our country’s national interest and national security.”407 NDRC can order the suspension or modification of an outbound investment deemed to “threaten the national interest and national security.”408 Where an outbound investment is deemed to “harm the national interest and national security,” NDRC can terminate or modify the investment, take “remedial measures,”409 issue a warning to the investors, and, where a crime is suspected to have occurred, pursue criminal liability.410 In addition, “national interest” and “national security” now serve as criteria for both “examination and approval” and “filing for records” reviews.411

The Chinese government also applies an expansive and inconsistent definition of “sensitive sectors.”

403 The 2014 NDRC Approval Measures applied solely to the overseas investments of PRC-registered enterprises (art. 2). The 2018 NDRC Approval Measures (art. 2) significantly expand this scope to also cover overseas investments that are made by foreign entities that are ultimately “controlled” by a PRC-registered enterprises. “‘Control’ (kongzhi) in the regulation is broadly defined to mean either holding the majority of voting shares of the overseas enterprise or, in lieu of such majority, having “decisive power” over the major matters of that enterprise, such as its operations or finances. This amendment broadens the ability of the NDRC to monitor overseas investments connected to a Chinese investor and subjects them to the same verification and approval or recordation requirements that applies to investments made by PRC-registered enterprises.

404 English translation of Chinese term guojia liyi.
405 English translation of Chinese term guojia anquan.
406 2018 NDRC Approval Measures, art. 5.
407 2018 NDRC Approval Measures, art. 6.
408 2018 NDRC Approval Measures, art. 56.
409 English translation of Chinese term bujiu cuoshi.
410 2018 NDRC Approval Measures, art. 56.
411 With respect to investments subject to “examination and approval,” art. 19 provides that the application form must include a “national interest and national security impact analysis”; art. 26 provides that NDRC will apply “not threaten or harm our country’s national interest and national security,” as well as conformity with “macro- adjustment and control policies,” as evaluating criteria; and art. 28 provides that NDRC is now authorized to “directly issue a non-approval decision”, without soliciting input or commissioning additional assessments, if an investment is deemed to “threaten or harm our country’s national interest and national security.”. With respect to investments subject to “filing for records”, art. 31 authorizes NDRC to reject the filing if the investment is deemed to “threaten or harm our country’s national interest and national security”.

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  

The 2016 edition of the Investment Catalogue states that “[r]elevant departments under the State Council will examine and approve projects in sensitive countries and regions and sensitive sectors,” yet fails to define the term “sensitive.”412

The 2018 NDRC Approval Measures list specific examples of “sensitive sectors,” but also define such sectors to include those that “require restricting enterprise outbound investment in accordance with our country’s macro-adjustment and control policies.”413

Likewise, the 2014 MOFCOM Approval Measures provide that MOFCOM will examine and approve investments in “sensitive sectors,” and explains that “the sectors for which examination and approval administration will be implemented refer to sectors that have a bearing on exports of products and technologies that are restricted for export from the PRC, and sectors that affect the interests of more than one country (region).”414 The inconsistent, vague, and open-ended use of this concept gives government agencies wide discretion to deploy their approval authority, and thus, the ability to influence the shape and direction of outbound investment.

e) Foreign exchange restrictions

Control over the use of foreign exchange is a crucial tool for the government to influence outbound investment. China operates a closed capital account that restricts currency convertibility, as well as monetary inflows and outflows.415 Once enterprises have successfully undergone “examination and approval” or “filing for records” with MOFCOM and NDRC, they undergo additional review and approval in order to receive foreign exchange to make outbound investments. Prior to 2015, enterprises seeking to invest abroad had to apply for foreign exchange directly with the State Administration of Foreign Exchange (SAFE); subject to a reform instituted in 2015, enterprises now undergo review and approval from local banks, under SAFE supervision and guidance.416

412 Investment Catalogue (2016 edition) § 12.
413 2018 NDRC Approval Measures, art. 13. The sectors listed are weapons equipment, trans-border water resource development and use, and news media.
414 2014 MOFCOM Approval Measures, art. 7.
415 China’s Capital Account – An Open and Shut Case, WALL STREET JOURNAL, Feb. 25, 2014. (“As part of its push to give markets a “decisive” role in the economy, China has pledged to drop controls on the movement of capital and make its currency, the yuan, fully convertible. China for years has maintained a “closed” capital account, meaning companies, banks and individuals can’t move money in or out of the country except in accordance with strict rules. The limit for individuals is currently $50,000 a year, while corporate investments need government approval.”).
416 Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving Policies on the Administration of Foreign Exchange for Direct Investment §§ 1(1)-1(2) (SAFE, Hui Fa [2015] No 13, issued Feb. 13, 2015). See also Thilo Hanneman, Daniel H. Rosen, RHODIUM, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 67-68 (Dec. 2016) (“[Prior to 2015], [t]he State Administration of Foreign Exchange (SAFE) became the third major actor in the outbound FDI approval system. SAFE was a hurdle that investors had to take as it controlled access to foreign currency needed for outbound investments. […] [I]n 2015 SAFE simplified and shortened the review process for foreign exchange approvals and delegated the verification of foreign exchange needs for outbound investments to local bank branches.”).

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Despite this recent change, SAFE significantly influences the decisions of local banks regarding the provision of foreign exchange.417 In 2016, the government reportedly introduced various types of restrictions on the use of foreign exchange.418 The restrictions were applied in an informal manner – i.e., not set forth in official government measures – to several forms of foreign investment disfavored by the government.419

Some observers have suggested that the government’s recent restrictions on certain outbound investments serve to enhance Chinese companies’ incentives to align their investments with government policies and priorities. According to the European Union Chamber of Commerce in China:

While [recent restrictions have] contributed to uncertainty regarding the ability of Chinese entities to complete investments, there is no reason to conclude that outbound investments that are not disguised capital flight or tainted by corruption will be brought to a halt, especially in sectors that have been identified as strategic priorities by the government. This conclusion is supported by a 26th December statement made at the 2016 National Commerce Work Conference by Minister of Commerce Gao Hucheng that the government “will promote the healthy and orderly development of outbound investment and cooperation” in 2017. During his January 2017 speech at the World Economic Forum in Davos, President Xi also stated that he expected outbound Chinese

417 Thilo Hanneman, Daniel H. Rosen, RHODIUM, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 70 (Dec. 2016) (“The degree of scrutiny exerted by banks depends on guidance by SAFE, and this guidance often correlates with the macroeconomic situation.”).
418 Thilo Hanneman, Daniel H. Rosen, RHODIUM, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 70 (Dec. 2016) (“In the first half of 2016, banks were asked by SAFE officials to tighten reviews of foreign exchange restrictions for outbound FDI projects following pressure by SAFE to slow down the outflow of foreign exchange. Banks were reportedly asked by SAFE to submit outbound FDI transactions of a certain size and type directly to SAFE.”). See also ALLEN & OVERY, CHINA’S NEW RESTRICTIONS ON OUTBOUND INVESTMENTS AND REMITTANCE (Dec. 30, 2016) (“1. Banks are now required to report any overseas transfer of $5m or more under any capital account item (covering both foreign currency and CNY) per transaction to Beijing SAFE. Such overseas transfers can only be made after the Chinese regulators have re‐examined the underlying transaction of the requested transfer to verify its authenticity and compliance with relevant regulations. 2. SAFE also tightened controls over ODI with a capital outflow of $50m or more. Such fund transfers will only be made after re- examination of the underlying transaction for authenticity and compliance with relevant regulations. 3.The rules for cross-border CNY lending by Chinese companies (which used to be more relaxed than the regime for cross-border lending in foreign currency) has also been modified by the PBOC recently. The cross-border lending limit (which is below 30 percent of the lender’s total equity) and shareholding requirement (that the lender and the borrower must have a shareholding relationship) which previously applied only to foreign currency lending now also applies to cross-border CNY lending. In addition, the rules now make it clear that such cross-border CNY lending by Chinese companies need to be registered with SAFE.”).
419 The Chinese government reportedly placed restrictions on: (1) Extra-large outbound investments: outbound real property acquisitions or developments by state-owned enterprises with an investment value of $1bn or above; outbound investments of more than $1bn outside of the core business of a Chinese buyer; and extra-large outbound investments valued at $10bn or more; (2) OFDI by limited partnership; (3) Minority investments in listed companies: OFDI involving the acquisition of 10 percent or less of the shares in an overseas listed company; (4) “Small parent, big subsidiary”: OFDI where the size of the target is substantially larger than the size of the Chinese buyer or where the Chinese buyer makes the investment shortly after its establishment; (5) Privatization: participation in the delisting of overseas listed companies which are ultimately controlled by Chinese companies or individuals; (6) High risk/low return transactions: OFDI into an overseas target resulting in a high debt-to-asset ratio and low return on equity. ALLEN & OVERY, CHINA’S NEW RESTRICTIONS ON OUTBOUND INVESTMENTS AND REMITTANCE (Dec. 30, 2016).

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investment to amount to USD 750 billion over the next five years. These strengthened controls may actually motivate more Chinese companies to look for ways to align their investment plans with government priorities outlined in [Made in China 2025], since presenting investments to the authorities that support their priorities—for example those outlined in [Made in China 2025] or the Belt and Road Initiative (BRI)—can be expected to achieve a higher rate of approval. 420

3. Sectors “Encouraged” for Outbound Investment

To channel outbound investments towards state priorities, China has instituted a system of “encouraged” 421 sectors. Although the list of encouraged sectors has evolved over time, the general approach is to induce investment in these sectors through preferential treatment and financing.

China launched this system in 2006, when NDRC, MOFCOM, and other government authorities jointly issued the Overseas Investment Industrial Guiding Policy.422 The stated objective of this policy was to “accelerate the implementation of the ‘Going Out’ strategy” and to “formulate a guiding policy especially for outbound investment pursuant to China’s five-year plans for national economic and social development and in accordance with requirements of investment system reform and industrial policy.”423

The Overseas Investment Industrial Guiding Policy identifies categories of “encouraged-type overseas investment projects;” (1) investments that enable the acquisition of resources and raw materials that are in short supply domestically and which are “in urgent demand for national economic and social development;” (2) investments that support the export of products, equipment, technology, and labor for which China has a comparative advantage; and, (3) investments that “are able to clearly enhance China’s technology research and development capacity, including an ability to use international leading technology and advanced management experience and professional talent.”424 Thus, the acquisition and subsequent use of technology is a central feature of “encouraged” outbound investments.

In addition, the Overseas Investment Industrial Guiding Policy targets specific sectors for preferential treatment. The policy includes a catalogue of 40 industries that are “encouraged” and eight industries that are “prohibited” for overseas investment. The catalogue appended to the Overseas Investment Industrial Guiding Policy includes several technology-related sectors, such as overseas manufacturing investments in chemical product manufacturing advanced technology which China is unable to access and passenger vehicles (including engine products with advanced technology), as well as overseas services investments relating to high and new technology and product research.425

420 E. U. CHAMBER, CHINA MANUFACTURING 2025: PUTTING INDUSTRIAL POLICY AHEAD OF MARKET FORCES 21 (2017) (emphasis added).
421 English translation of Chinese term guli.
422 Overseas Investment Industrial Guiding Policy (NDRC, MOFCOM, Ministry of Foreign Affairs, GAC, SAFE, Fa Gai Wai Zi [2006] No. 1312, issued July 5, 2006).

423 Overseas Investment Industrial Guiding Policy, art. 1.
424 Overseas Investment Industrial Guiding Policy, art. 6.
425 Overseas Investment Industrial Guiding Policy, Annex §§ 3(8), 3(17), 4(5).

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Investments that are “encouraged” receive several forms of government support, including: subsidies for fees incurred, and bank loans at government-subsidized interest rates; policy bank loan support; priority administrative approval; priority support for the use of foreign exchange; export tax rebates on exports of equipment and other materials relating to the overseas investment project; priority access to services relating to overseas financing, investment consultation, risk evaluation, risk control, and investment insurance; and coordinated support from several government departments with respect to information exchange, diplomatic protections, the travel of personnel abroad, and registration of import and export rights.426

A recent State Council opinion clarifies and supplements this approach. In its Guiding Opinion on Further Guiding and Standardizing the Direction of Overseas Investment (2017 Investment Opinion), issued in August 2017, the State Council re-affirmed the importance of “catalyzing the ‘Going Out’ strategy for products, technologies, and services.”427 It also aims to expand the speed, scale, and efficacy of China’s outbound investment, so as to promote “transformation and upgrading of the domestic economy” and “international industrial capacity cooperation.”428

In addition, the 2017 Investment Opinion re-defines the broad categories of “encouraged” investments. Technology acquisition and utilization is a key consideration in determining whether a sector is “encouraged.” For instance, the 2017 Investment Opinion encourages investments that strengthen “investment cooperation” with “overseas high and new technology and advanced manufacturing industry enterprises,” as well as investments that promote the “sending out” from China to the world of “advantageous manufacturing capacity, advantageous equipment, and technology standards.”429

Echoing previous state policies, the 2017 Investment Opinion also states that “encouraged” investments will receive “a more enhanced level of service with respect to tax collection, foreign exchange, insurance, customs, information, and other matters, so as to create more favorable facilitating conditions for the enterprise,”430 In addition, the opinion introduces the “negative list” concept431 with respect to general overseas investment.

4. Outbound Investment Policy in Technology and Sectoral Policies

As mentioned in Section I.C, China has issued a series of science and technology (S&T) and sectoral policies that are intended to promote indigenous innovation and technology transfer. S&T planning documents also reference the role of outbound investment in achieving these objectives. For instance, the 2010 Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries (SEI Decision) – which targets strategic emerging industries –

426 Overseas Investment Industrial Guiding Policy, art. 8.
427 Guiding Opinion on Further Guiding and Standardizing the Direction of Foreign Investment, preamble (NDRC, MOFCOM, PBOC, Ministry of Foreign Affairs, Guo Ban Fa [2017] No. 74, issued Aug. 4, 2017).
428 2017 Investment Opinion Preamble, § 3.
429 2017 Investment Opinion §§ 3(1)-3(6).
430 2017 Investment Opinion § 6(1).
431 2017 Investment Opinion § 2, ¶2.

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contains provisions on “deepening international cooperation and enhancing the level of internationalized development.”432 The document calls on authorities to:

Pragmatically enhance the quality and level of international investment financing cooperation. […] Support capable enterprises to engage in overseas investment […] Expand the autonomy of enterprises to make overseas investments, improve the approval process, and further amplify foreign exchange support for enterprises to make overseas investments. Actively explore the establishment of science and technology and industrial parks abroad, formulate a country-specific industrial guidance catalogue to guide enterprises in development of multinational investments.433

The SEI Decision also calls for “supporting enterprises to use methods including overseas registered trademarks and overseas acquisitions […]”434

Likewise, the Made in China 2025 Notice, which, as discussed in Section I.C, serves as the basis for the Made in China 2025 policy, calls for “supporting enterprises to make acquisitions, equity investments, and venture investments overseas, and to establish R&D centers and testing bases and global distribution and services networks overseas.”435 The Made in China 2025 Notice also outlines a wide-ranging strategy for harnessing and promoting the acquisition of foreign technology through outbound investment:

[…] Promote a transition from prioritizing introducing investment, technology, and equipment to the development of joint ventures and cooperation, outbound acquisitions, and the introduction of leading talent. Strengthen legislation governing outbound investment, strengthen “Going Out” legal guarantees for manufacturing enterprises, and standardize enterprise overseas operating behavior, to protect enterprises’ lawful rights. Explore the use of industrial funds, state-owned capital dividends, and other channels to support the “Going Out” of advantageous manufacturing capacity including high-speed rail, power generation equipment, automobiles, and engineering, to implement overseas investment acquisitions. Accelerate the establishment of entities for, and enhance the level of, services that support manufacturing industries “Going Out”; establish a public service platform for manufacturing industry outbound investment and a services platform for export product technology-type trade, and optimize early warning coordinating mechanisms to respond to trade frictions and major incidents in outbound investment.436

Planning documents for the ITC and IC sectors also emphasize the role of outbound investment in promoting technological development. For instance, the Made in China 2025 Key Area Technology Roadmap (Made in China 2025 Roadmap) contains a chapter devoted to the IT sector, and calls for development in this sector through the “Going Out” strategy

432 Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries § 6 (State Council, Guo Fa [2010] No. 32, issued Oct. 10, 2010).
433 SEI Decision § 6(2).
434 SEI Decision § 6(3).

435 Made in China 2025 Notice § 3, “Strategic Tasks and Priorities,” § 3(9), “Raise the Level of Internationalized Development of the Manufacturing Industry.”
436 Made in China 2025 Notice § 4, “Strategy Support and Guarantees,” § 4(7), “Further Expand Opening Up of Manufacturing Industries”.

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and overseas investment.437 The 2014 IC Guidelines also call for “encourag[ing] domestic enterprises to engage in international cooperation, integrate international resources, and expand international markets,” in conjunction with “making every effort to introduce foreign capital, technology, and talent” into China and encouraging international IT enterprises to “establish R&D, manufacturing, and operating centers [in China].”438

5. State-Backed Actors

To implement its outbound investment strategy, China relies on an array of actors with ties to the government. These actors have traditionally comprised non-financial SOEs and the largest state- owned policy and commercial banks. But more recently, this set of actors has grown to include nominally private enterprises and financial entities, such as funds and investment companies, that have connections with or are funded by the government. Each group of actors is discussed in more detail below.

a) State-Owned Enterprises and State-owned Banks

In the early stages of Chinese outbound investment, SOEs played a leading role – particularly national oil companies and state-owned mining and metal processing companies.439 Today, SOEs continue to account for a significant share of overall outbound investment, and are responsible for many of the largest overseas transactions.440 For example, the central SOE ChemChina acquired the Swiss firm Syngenta for $43 billion in 2016.441 State-owned banks, in particular the policy banks China Exim and CDB, and the four largest state-owned commercial banks, have facilitated outbound investments, primarily through financing support to SOEs.442 In October 2016, China’s president Xi Jinping, who also serves as General Secretary of the CCP, described

437 Made in China 2025 Key Area Technology Roadmap § 1.2.5.4 (National Strategic Advisory Committee on Building a Powerful Manufacturing Nation, issued Oct. 2015).
438 Formal Announcement of Guidelines for the Development and Promotion of the Integrated Circuit Industry § 4(8) (MIIT, issued June 24, 2014).

439 For studies of investments by Chinese SOEs in the mining and energy sectors, see, e.g. ROBERT EVAN ELLIS, THE EXPANDING CHINESE FOOTPRINT IN LATIN AMERICA: NEW CHALLENGES FOR CHINA AND DILEMMAS FOR THE US (2012); Ruben Gonzalez-Vicente, Mapping Chinese Mining Investment in Latin America: Politics or Market?, THE CHINA Q. 209 35, 35–58 (2012); BARBARA KOTSCHWAR,THEODORE H. MORAN & JULIA MUIR, CHINESE INVESTMENT IN LATIN AMERICAN RESOURCES: THE GOOD, THE BAD, AND THE UGLY, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS (2012); Chen Shaofeng, Has China’s Foreign Energy Quest Enhanced Its Energy Security?” THE CHINA QUARTERLY 207, 600–625 (2011); CHRIS ALDEN ET AL (ED.), CHINA RETURNS TO AFRICA: A RISING POWER AND A CONTINENT EMBRACE (C. Hurst & Co Publishers Ltd 2008); Erica S. Downs, The Fact and Fiction of Sino-African Energy Relations, 3(3) CHINA SECURITY 42, 42–68 (2007).

440 Thilo Hanneman, Daniel H. Rosen, RHODIUM, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 7 (2016), (“[recent] Chinese restructuring plans suggest that SOEs will remain an important part of China’s FDI flows in years ahead . . . ); see also Haiyan Zhang & Daniel Van Den Bulcke, China’s Direct Investment in the European Union: A New Regulatory Challenge, 12 ASIA EUROPE J. 168, 168 (2014) (“The five Chinese ‘acquirers’ that were investigated within the [EU Merger Regulation] framework were all large state-owned enterprises that are ranked among Fortune Magazine’s global 500 companies, i.e. China National Bluestar of ChemChina, Huaneng, Sinochem, China National Agrochemical Corporation and PetroChina.”).

441 Press Release, Syngenta, ChemChina Cash Offer to Acquire Syngenta at a Value of Over US$ 43 Billion (Mar. 2, 2016).
442 See Kevin P. Gallagher & Amos Irwin, Exporting National Champions: China’s Outward Foreign Direct Investment Finance in Comparative Perspective, 22 CHINA & WORLD ECONOMY 6, 1–21 (2014).

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the role of SOEs as extensions of the Party-state, and clarified that SOEs are “important forces to implement decisions” of the CCP and “major strategies,” such as industrial “Going Out” strategies to “enhance overall national power, economic and social development, and people’s wellbeing.”443

SOEs remain prevalent throughout the Chinese economy, and are market leaders in key sectors deemed strategic by the government, such as banking and finance, energy, telecommunications, aviation, and automotive.444 The presence of SOEs in the Chinese economy is especially evident with respect to credit allocation. The International Monetary Fund (IMF), for example, reports that domestically the “SOE share in credit stock” was 55.6 percent in 2014.445

SOEs are also subject to state direction and control. Indeed, the Chinese government has a constitutional and legal mandate to maintain a leading role for the state sector.446 The largest central SOEs in China are administered by the State Council’s State-owned Assets Supervision

443Xi Stresses CPC Leadership of State-owned Enterprises, XINHUA NEWS, Oct. 11, 2016, available at http://news.xinhuanet.com/english/2016-10/11/c135746608.htm.
444 For example:

•   In the banking sector, the “Big Five” commercial banks in China – Bank of China (BoC), Industrial and Commercial Bank of China (ICBC), China Construction Bank Corporation (CCBC), Agriculture Bank of China (ABC), and Bank of Communications (BCM) – are majority-owned by the central government and account for almost half the total loan market. BROOKINGS, THE CHINESE FINANCIAL SYSTEM: AN INTRODUCTION AND OVERVIEW
•   In the oil and gas sector, three enterprises administered by SASAC—China National Offshore Oil Corp., China National Petroleum Corp. and Sinopec—accounted for 94 percent of domestic oil production and 99 percent of domestic gas production in 2015. See Lei Wang, Presentation to the Colorado School of Mines at the Oil & Gas Conference, slide 13 (Aug. 17, 2016).
•   In the aviation sector, Commercial Aircraft Corporation of China, Ltd. (COMAC), managed by SASAC, is the only major firm dedicated to producing large commercial aircraft. See Keith Crane et al, RAND, THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 25 (2014). See also About Us, COMMERCIAL AIRCRAFT CORPORATION OF CHINA, LTD., http://english.comac.cc/aboutus (last visited Jan.11, 2018); China’s Big Three Airlines Set to Report Biggest Combined Profit Since 2010, BLOOMBERG NEWS, Mar. 29, 2017.
•   In the automotive sector, the market leaders in domestic vehicle sales are joint ventures between foreign automakers and the three SIEs: Shanghai Automotive Industry Corp., First Automotive Works, and Dongfeng Motor Corporation. See Top 10 Chinese Automotive Firms by Revenue in 2015, CHINA DAILY, Jun. 6, 2016.

  445 KANG ET AL., PEOPLE’S REPUBLIC OF CHINA: SELECTED ISSUES, INTERNATIONAL MONETARY FUND COUNTRY REPORT NO. 16/271, at “Table 1. Rebalancing Score Card” (2016).
  446 The guiding principles for government ownership and control are set forth in the Constitution of the People’s Republic of China [hereinafter “China Constitution”] and the CCP Constitution. China Constitution, art. 7, provides that “[t]he state-owned economy, that is, the socialist economy with ownership by the whole people, is the leading force in the national economy. The state ensures the consolidation and growth of the state-owned economy.” Article 11 also provides that “[t]he state permits the private sector of the economy to exist and develop within the limits prescribed by law. The private sector of the economy is an important component of the socialist market economy.” Article 11 states that “[t] he state encourages, supports, and guides the development of the non- public sectors of the economy […]” (emphasis added). The state is to take active steps to ensure the growth of the state-owned economy as the core of the economic system, and it will also intervene in the private sector, a component of the overall economy. The CCP Constitution, in turn, states: “[T]he Party must uphold and improve the basic economic system, with public ownership playing a dominant role and different economic sectors developing side by side […]” (emphasis added). Accordingly, CCP members and the leadership have a mandate to ensure the dominance of the state and SOEs in the economy.

DOUGLAS J ELLIOTT & KAI YAN,

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and Administration Commission (SASAC), the government’s representative shareholder responsible for the largest central government SOEs. Likewise, provincial and municipal SOEs are administered by local SASAC entities. Other government bodies are also controlling shareholders of certain enterprises.

SASAC imposes an elaborate system of rules, plans, and reporting requirements, which it uses to monitor and influence the outbound investments of central SOEs. SASAC has articulated these requirements in two measures: the Provisional Measures on Supervision and Administration of Central State-Owned Enterprise Overseas Investments (2012 SOE Measures),447 and its successor, the Measures on Supervision and Administration of Central State-Owned Enterprise Overseas Investments (2017 SOE Measures).448

•   Conformity with state policies: The 2012 SOE Measures stipulated that when undertaking outbound investments, SOEs are to act in accordance with basic principles including “conformity with plans for national economic and social development and overseas investment industrial policies;” “conformity with the composition of the state- owned economy and the direction of structural adjustment;” “conformity with enterprise- level strategies for development and enterprise-level strategies for internationalizing operations, focusing on core industries, conducive to enhancing the enterprise’s international competitiveness.”449 The updated 2017 SOE Measures simplify these principles, but likewise maintain that central SOEs are to act in accordance with “strategic guidance,” including devising plans to internationalize their business and making investments that enhance innovative capacity and international competitiveness.450 Central SOEs are also to abide by the principle of “maintaining and enhancing the value of state-owned assets” when undertaking outbound investments.451
•   Negative list: The 2017 SOE Measures call for establishing an “enterprise overseas investment administration system.” As part of this system, central SOEs are to act in accordance with an individualized “negative list”452 formulated by SASAC that outlines types of investments the enterprise should not make. If the enterprise nonetheless chooses to make a “negative list” investment, it must seek formal approval from SASAC and submit a prescribed set of application materials, including internal company decision documents, a financing plan, and feasibility study.453

  447 Provisional Measures on Supervision and Administration of Central State-Owned Enterprise Overseas Investments (SASAC, 2012 Order No. 28, issued Mar. 18, 2012).
  448 Measures on Supervision and Administration of Central State-Owned Enterprise Overseas Investments (SASAC, 2017 Order No. 35, issued Jan. 7, 2017). This measure was formulated expressly pursuant to laws and regulations governing state-owned assets and recent initiative to improve the performance of SOEs. The 2017 SOE Measures were issued pursuant to the Guiding Opinion on Deepening Reform of State-owned Enterprises (CCP Central Committee and State Council, Guo Fa [2015] No. 22, issued Aug. 24, 2015), the Several Opinions on Reforming and Optimizing the State-owned Asset Administration System (State Council, Guo Fa [2015] No. 63, issued Oct. 25, 2015).
  449 2012 SOE Measures, art. 5.
  450 2017 SOE Measures, art. 6(1).
  451 2017 SOE Measures, art. 6(4).
  452 English translation of Chinese term fumian qingdan.
  453 2017 SOE Measures, arts. 7, 12.

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Overseas investment plans: The 2017 SOE Measures state that central SOEs are to formulate “plans for the internationalization of operations”454 that define priority regions, sectors, and projects for medium- and long-term internationalization of operations, in accordance with state-owned enterprise five-year plan outlines and enterprise development strategies and plans formulated by SASAC. In turn, central SOEs are to formulate a more detailed “annual overseas investment plan455.”456

Reporting obligations: The 2017 SOE Measures also instruct central SOEs to submit quarterly reports on the status of overseas investments to SASAC via an internal IT network, and to draft an “annual overseas investment completion status report” to be submitted to SASAC on January 31 of each year, which is to detail the overall status and positive results of overseas investment, progress on major overseas investment projects, and a post-investment evaluation work, and the main problems confronted.457

Review and discipline: The 2017 SOE Measures provide that SASAC will establish a system of indices to evaluate the internationalization of operations of central SOEs, to include, among other criteria, the “direction of investment.”458 Moreover, if central SOE personel take actions in outbound investment that “cause an unfavorable impact,” SASAC will take disciplinary action against those personnel. If the actions “cause the loss of state-owned assets,” then the CCP can take disciplinary action; and if the actions violate the law, the personnel can be handed over to law enforcement.459

In addition to SASAC, the Ministry of Finance (MOF) has recently adopted regulations specific to the outbound investment of SOEs. The Measures on the Financial Administration of State- owned Enterprises Overseas Investment (MOF Measures), issued in June 2017, call for “enhanc[ing] the capacity of state-owned capital in the service of national strategies including ‘One-Belt One-Road’ and ‘Going Out.’”460 The MOF Measures provide that an SOE’s CCP Committee is to participate, alongside the company’s board, chief executives, and shareholders, in deliberating the financial feasibility of the projects outlined in the enterprise’s “overseas investment plan.”461

Under the MOF Measures, SOEs also must submit to MOF annual reports on the financial status of overseas investments.462 Local branches of MOF are in charge of collecting and summarizing these documents.463 SOEs also are required to provide an annual overseas investment evaluation report, which will largely determine (1) the degree of government support for that SOE’s overseas investment activities, (2) the state shareholders’ treatment of the SOE (e.g., whether to

454 English translation of Chinese term guojihua jingying guihua. 455 English translation of Chinese term niandu jingwai touzi jihua. 456 2017 SOE Measures, art. 11.
457 2017 SOE Measures, arts. 19, 20.

458 2017 SOE Measures, arts. 22, 23.
459 2017 SOE Measures, art. 30.
460 Notice on Issuing the “Measures on the Financial Administration of State-owned Enterprises Overseas Investment”, cover sheet (MOF, Cai Zi [2017] No. 24, issued Jun. 12, 2017).
461 MOF Measures, arts. 6, 7.
462 MOF Measures, art. 8.
463 MOF Measures, art. 9.

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restructure the enterprise’s assets), and (3) local government officials’ assessment of how well the SOE is executing its “Going Out” strategy, and whether more support should be provided to the SOE for “Going Out” purposes.464

Through the CCP, the Chinese government exercises additional control over SOE behavior. Top executives of SOEs are generally CCP members, cycle between corporate and government positions, and are subject to evaluation by the CCP Organization Department.465 SOEs also host CCP committees that actively participate in corporate governance. This arrangement is codified in Chinese law: according to Article 19 of the Company Law of the People’s Republic of China (PRC Company Law),466 an organization of the CCP may be set up in all enterprises, regardless of whether it is a state, private, domestic, or foreign-invested enterprise, to carry out activities of the CCP.

There are indications that a coordinated push is now underway to increase Party committee influence on company decisions.467 More than thirty Hong Kong-listed Chinese SOEs reportedly altered their articles of association in 2017 to codify a more explicit operational role for their internal Party committees. 468 For instance, Sinopec amended its articles of association to call for increased CCP input on major corporate matters and management personnel:

When making decisions on significant matters such as direction of reform and development, key objectives, and priority operational arrangements of the Company, the board of directors should seek advice from the Party organization. When the board of directors appoints the management personnel of the Company, the Party organization shall consider and provide comments on the candidates for management positions nominated by the board of directors or the president, or recommend candidates to the board of directors and/or the president.469

464 MOF Measures, arts. 39-41.
465 U.S. DEPARTMENT OF COMMERCE, CHINA’S STATUS AS A NON-MARKET ECONOMY 82-94 (Oct. 26, 2017). RICHARD MCGREGOR, THE CCP: THE SECRET WORLD OF CHINA’S COMMUNIST RULERS 49-50 (2010) (stating that “the CCP has remained unyielding on a number of fronts. Its control over personnel appointments has been inviolate.”); see also, ZHENG YONGNIAN, THE CHINESE COMMUNIST PARTY AS ORGANIZATIONAL EMPEROR: CULTURE, REPRODUCTION, AND TRANSFORMATION 103-104 (2010) (“The CCP’s most powerful instrument in structuring its domination over the state is a system called the ‘Party management of cadres’ (dangguan ganbu), or more commonly known in the West as the nomenklatura system. The nomenklatura system ‘consists of lists of leading positions, over which Party units exercise the power to make appointments and dismissals; lists of reserves or candidates for these positions; and institutions and processes for making the appropriate personnel changes.’”). 466 PRC Company Law (adopted by the NPC on Dec. 29, 1993, amended Dec. 25, 1999, further amended Aug. 28, 2004 and Oct. 27, 2005 and Dec. 28, 2013).
467 These efforts may be traced back to the March 2012 release of a document titled “Opinions on Strengthening and Improving Party Building in Nonstate Enterprises,” issued by the CCP Organization Department. More recently, the party has issued a directive targeting party-building in entrepreneurial ventures. See Opinions on Creating a Healthy Environment for the Development of Entrepreneurs, Promoting Entrepreneurship and Allowing Full Play to the Role Played by Entrepreneurs (CCP and State Council, Sept. 8, 2017).
468 Jennifer Hughes, China’s Communist Party Writes Itself into Company Law, FINANCIAL TIMES, Aug. 14, 2017. 469 SINOPEC, PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION AND THE RULES OF PROCEDURE FOR THE BOARD OF DIRECTORS’ MEETING, art. 109, available at http://www.hkexnews.hk/listedco/listconews/SEHK/2017/0427/LTN201704272794.pdf

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Given the level of control exerted over SOEs by the state and CCP, outbound investment by SOEs is frequently directed at achieving state policies and objectives. As one participant in the investigation observed, “[m]uch Chinese FDI comes from state-owned enterprises that often have different motives than simply maximizing profits. Rather, their investments often serve strategic state goals.”470 Likewise, in its 2017 report on China’s status as a non-market economy, the European Commission remarked on “the [Chinese] government’s determination to further develop the dominant role of the state-owned economy, in particular by selectively creating large SOEs, shielded from competition domestically and expanding internationally which would serve the Government’s strategic industrial policies rather than focusing on their own economic performance.”471

Tsinghua Unigroup and its parent company, Tsinghua Holdings Co., Ltd. (Tsinghua Holdings), illustrate the extent to which state policies direct SOE activities, including outbound investment. The decision to establish Tsinghua Holdings was approved by the State Council.472 Tsinghua Holdings is wholly state-owned,473 via Tsinghua University,474 and controls Tsinghua Unigroup through a 51 percent ownership stake.475 Tsinghua Unigroup is funded, in part, through an equity investment of CNY 10 billion ($1.6 billion)476 from China’s National Integrated Circuit Investment Fund (National IC Fund).477 At one point the company’s CCP secretary was Hu Haifeng, the son of China’s former president Hu Jintao.478 Reflecting these state ties, Tsinghua Holdings notes in its annual report that its development strategy is oriented toward the needs of national strategy,479 and that Tsinghua Unigroup employs an “international acquisition + indigenous innovation” development model focused on the IC industry.480

Tsinghua Unigroup’s Chairman, Zhao Weiguo, is also the Deputy Director General of the “China High-End Chip Alliance,” which is composed of 27 “backbone enterprises” and research institutes and is tasked with creating an IC industry ecosystem in China. The alliance was

470 INFORMATION TECHNOLOGY & INNOVATION FOUNDATION [hereinafter “ITIF”], Submission, Section 301 Hearing 7 (Oct. 25, 2017).
471 EUROPEAN COMMISSION, COMMISSION STAFF WORKING DOCUMENT ON SIGNIFICANT DISTORTIONS IN THE ECONOMY OF THE PEOPLE’S REPUBLIC OF CHINA FOR THE PURPOSES OF TRADE DEFENCE INVESTIGATIONS 108-109 (SWD(2017)483 final/2 (Dec. 20, 2012).

472 Letter Regarding Approval for Beijing University and Tsinghua University to Establish Peking University Asset Management Company Limited and Tsinghua Holdings Company Limited (State Council, Guo Ban Han [2003] No. 30, issued Apr. 24, 2003).
473 TSINGHUA HOLDINGS, 2016 BOND PROSPECTUS 13[Chinese] (2016).

474 Imagination Technologies filing with the U.K. Financial Conduct Authority, TR-1: Notification of Major Interest in Shares, notified on May 22, 2017.
475 TSINGHUA HOLDINGS, 2016 BOND PROSPECTUS 44 [Chinese] (2016).
476 Foreign currency values are followed by a parenthetical estimation of the USD value. When available, USD conversion values are taken from primary or secondary sources. In cases where a U.S. dollar estimate is unavailable, the foreign currency value is generally based on the U.S. Federal Reserve Bank average annual exchange rate for the relevant year. The U.S. Federal Reserve Bank’s average annual currency exchange rates are available at https://fred.stlouisfed.org.

477 Press Release, Tsinghua Unigroup, Tsinghua Unigroup Receives CNY 10 Billion Investment from the National Integrated Circuit Investment Fund [Chinese] (Feb.14, 2015), available at http://www.unigroup.com.cn/newscenter/jtxw/2015/0214/138.html.
478 Gerry Shih, Political Ties Could Prove Double-edged Sword for Chinese Chipmaker, REUTERS, July 14, 2015. 479 TSINGHUA HOLDINGS, 2016 BOND ANNUAL REPORT 55 [Chinese] (Apr. 28, 2017).

480 TSINGHUA HOLDINGS, 2016 BOND ANNUAL REPORT 50 [Chinese] (Apr. 28, 2017).

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proposed by Chairman Xi and established by the National IC Industry Development Leading Small Group in July 2016.481 On the establishment of the alliance, Tsinghua Unigroup’s Chairman stated that:

We are in the midst of a great country, a great era, and a great undertaking. The establishment of the ‘China High-End Chip Alliance’ expresses the desire of the alliance members and the broader China IC industry to work as one to carry out properly the great undertaking that is China’s IC industry. We will work together to consolidate industry resources and advance strategy, technology, standards, the market, and other cooperative links to jointly drive the future of China’s chip industry.482

Reflecting its commitment to these objectives, Tsinghua Unigroup has attempted to acquire several U.S. IC companies. In July 2015, Unigroup made a $23 billion bid for Micron Technologies, the Idaho-based world leader in memory chips, but the deal was abandoned, reportedly due to concerns about whether the Committee on Foreign Investment in the United States (CFIUS) would approve the transaction.483 Unigroup, through its Unisplendour subsidiary, also offered to purchase a 15 percent stake in Western Digital, an industry leader in storage solutions; but the offer was withdrawn in early 2016, reportedly due to concerns with CFIUS scrutiny of the transaction.484

b) Other Enterprises with State Support and Linkages

A growing share of China’s outbound investment is undertaken by private enterprises in which the government does not own an observable controlling stake.485 Nonetheless, the government may exert substantial influence over the outbound investment behavior of such nominally private

481 Press Release, Chipone, IC National Team: Which Enterprises Participate in the High-end Chip Alliance? [Chinese] (Aug. 8, 2016), available at http://www.chiponeic.com/content/details1264.html.
482 Press Release, Tsinghua Unigroup, Tsinghua Unigroup Joins Hands with 27 Organizations to Jointly Establish the ‘China High-End Chip Alliance’ [Chinese] (Aug. 2, 2016), available at http://www.unigroup.com.cn/newscenter/jtxw/2016/0802/238.html. The General Manager of the National IC Fund, Ding Wenwu, is Director General of the Alliance. Press Release, Chipone, IC National Team: Which Enterprises Participate in the High-end Chip Alliance? [Chinese] (Aug. 8, 2016), available at http://www.chiponeic.com/content/details1264.html.
483 Liana B. Baker, Greg Roumeliotis, Exclusive: Micron does not believe deal with Tsinghua is possible – sources, REUTERS, July 21, 2015.
484 Tsinghua Kills $3.8bn Investment Plan in Western Digital, FINANCIAL TIMES, Feb. 23, 2016.
485 Thilo Hanneman, Daniel H. Rosen, RHODIUM GROUP, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 7 (Dec. 2016) ( “The shift in investment patterns has also informed the mix of Chinese investors in the US economy. Previously dominated by trading companies and large state-owned enterprises (SOEs), investment in recent years was almost entirely driven by private sector firms.”). But see also Curtis J. Milhaupt & Wentong Zheng, Beyond Ownership: State Capitalism and the Chinese Firm, 103 GEO. L.J. 665, 701 (2015) (stating that “[o]wnership of the firm as such provides relatively little information about the degree of autonomy the firm enjoys from the state… because the Chinese party state retains (relatively undefined) residual control rights in firms of all types, corporate ‘ownership’ is less central to understanding the attributes of the Chinese firm as compared to firms operating under market-neutral institutions and relatively robust constraints on state intervention.”).

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entities through other means – for instance, through the government approvals and financing processes described above, and the pervasive influence of the CCP.486

As discussed above, the outbound investment approvals system applies to all enterprises, not just SOEs. This gives the state a decisive role in determining which industry sectors should be targeted or closed for overseas investment. As a result, any enterprise seeking to receive government support for such acquisitions are incentivized to invest in sectors favored by the government, including those classified as “encouraged” in outbound investment measures and those identified in major S&T plans such as the Made in China 2025 Notice.487

Senior executives at China’s largest private companies regularly acknowledge the influence of this investment approvals system on their investment decisions. For instance, the 2017 Investment Opinion of the State Council restricted overseas investments in property, sports, hotels, cinemas and entertainment,488 and encouraged companies to invest in China’s “One-Belt One-Road” initiative.489 Two of China’s largest overseas acquirers publicly announced their intention to comply with the new policy direction. Adam Tan, CEO of Hainan Airlines (HNA), noted that the company would “listen to orders” and pledged that HNA “will not invest in anything the government does not support.”490 Wang Jianlin, CEO of Wanda Group, stated that the company has “actively respond[ed] to the state’s call and decided to put its main investments within China.” 491 Wang further noted that recent asset sales were based on “state policy and the macro-environment.”492 One U.S. lawyer, commenting on the effect of this policy change on his

486 See e.g Bruce J. Dickson, Integrating Wealth and Power in China: The Communist Party’s Embrace of the Private Sector, 192 THE CHINA Q. (2007). Xiaojun Yan & Jie Huang, Navigating Unknown Waters: The Chinese Communist Party’s New Presence in the Private Sector, 37 CHINA REV. (2017).
487 E.U. CHAMBER, CHINA MANUFACTURING 2025: PUTTING INDUSTRIAL POLICY AHEAD OF MARKET FORCES 18-19 (2017).

488 Guiding Opinion on Further Guiding and Standardizing the Direction of Foreign Investment § 4 (NDRC, MOFCOM, PBOC, Ministry of Foreign Affairs, Guo Ban Fa [2017] No. 74, issued Aug. 4, 2017).
489 2017 Investment Opinion § 2.
490 Over the last several years, HNA has invested in Deutsche Bank, Swissport, Carlson Hotels, Hilton Worldwide, Ingram Micro, and logistics firm CWT. Frank Tang, China’s HNA Says It Will Pull Out of Deals on Beijing’s Investment Blacklist, SOUTH CHINA MORNING POST, Nov. 27, 2017. See also HNA Considers Asset Sales, Signals Reversal of Buying Spree, BLOOMBERG, Nov. 28, 2017.

491 Hou Wen & Han Wei, Wanda Will Keep Major Investments in China, CAIXIN, July 21, 2017. In recent years Wanda has acquired AMC Cinemas, Carmike, Odeon UCI Legendary Entertainment, Infront Sports, World Triathlon, and yacht maker Sunseeker. In 2015, the New York Times noted that Wanda’s increase in overseas media acquisitions “coincided with a policy push by the Chinese leadership to expand the nation’s cultural influence both overseas and at home.” Michael Forsythe, Wang Jianlin, A Billionaire at the Intersection of Business and Power in China, NEW YORK TIMES, Apr. 28, 2015.

492 Wang’s comments came before China officially issued its new foreign investment restrictions but after China’s National Reform and Development Commission had issued informal guidance suggesting the rules were forthcoming. Michael Forsythe, Wang Jianlin, A Billionaire at the Intersection of Business and Power in China, NEW YORK TIMES, Apr. 28, 2015. Although the asset sales involved properties located on mainland China, they were viewed as necessary to free up working capital following the government’s decision to withhold financing for some of the company’s overseas deals. Li Xuanmin, Wanda in Big Sell-off, GLOBAL TIMES, Aug. 2, 2017 (“The conglomerate’s surprising move comes after the central government began prioritizing financial risk reduction in the second half of this year and warned against ‘irrational investment abroad,’ which the market believe has prompted Wang’s knee-jerk decision.”).

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Chinese clients, noted that his clients had merely redirected outbound investment from real estate and hotels to industries such as mining and aviation.493

These statements suggest that private companies’ overseas investment decisions are not, as claimed by some participants in the investigation, wholly based on “market need” and “without intervention by the Chinese government,”494 but rather are strongly influenced by the Chinese government’s decision to encourage or restrict a given overseas investment sector in line with the country’s industrial policy.

Pervasive state involvement in China’s financial sector is closely tied to China’s outbound investment approvals regime. Private enterprises often rely on capital from state-owned policy banks, state-owned commercial banks, or state-backed funds to make an investment project viable.495 Moreover, there is an “abundance of empirical evidence [indicating] that the political connections of [private] firms in China are a strong indicator of their access to bank loans.”496 This relationship is reinforced by government policy that directs state-owned financial institutions to support technological development objectives. For example, the 2014 IC Guidelines and the International Cooperation Opinion expressly direct China Exim and CDB to

493 Sui-Lee Wee, Geely Buys Take in Volvo Trucks, Despite China Restrictions, NEW YORK TIMES, Dec. 27, 2017. 494 See, e.g., Wang Guiqing, CHINA CHAMBER OF COMMERCE FOR IMPORT AND EXPORT OF MACHINERY AND ELECTRONIC PRODUCTS [hereinafter “CCCME”], Testimony, Section 301 Hearing 159 (Oct. 10, 2017) (explaining that business operations and acquisitions are “market oriented,” and “[t]here is no intervention by the Chinese government in companies’ business decisions”); John Tang, DHH WASHINGTON DC LAW OFFICE P.C. [hereinafter “DHH”], Testimony, Section 301 Hearing 155 (Oct. 10, 2017) (“Chinese companies including our firm have made billions of investments in the U.S. These investments are purely driven by market need. […] [P]olitics does not have an influence on the business decisions.”); CCCME, Submission, Section 301 Hearing 11 (Sept. 28, 2017) (“Chinese companies can choose any project independently and there are no government-motivated actions.”); DHH, Submission, Section 301 Hearing 7 (Sept. 28, 2017) (“Chinese acquisitions overseas (including intellectual property) are not driven by the government, but instead by market need.”); CHINA CHAMBER OF INTERNATIONAL COMMERCE [hereinafter “CCOIC”], Submission, Section 301 Hearing 64-65 (Sept. 26, 2017) (“Chinese companies’ investment and acquisition in U.S. companies is normal commercial behavior, with no government direction behind it.”).

495 U.S.-CHINA ECON. & SEC. REV. COMM’N, 2016 ANNUAL REPORT TO CONGRESS 102 (2016) (“Private firms often rely heavily on government subsidies to increase profit margins. In Professor Zheng’s testimony to the Commission, he explained that private companies ‘have to have the help of the state in order to prosper or even survive.’ Huawei, for example, is a privately held firm but receives major funding from state-owned commercial and policy banks due to its status as a “national champion.” […] [A] private automobile manufacturer, BYD Co., has also benefitted from state support, receiving $108 million in 2013 from local and central government subsidies, nearly 130 percent of its net profits for the year.”).

496 Curtis J. Milhaupt & Wentong Zheng, Beyond Ownership: State Capitalism and the Chinese Firm, 103 GEO. L.J. 665, 690 (2015) (citing e.g., Clement Kong Wing Chow et al., Investment Opportunity Set, Political Connection and Business Policies of Private Enterprises in China, 38 REV. QUANTITATIVE FIN. ACCT. 367 (2012) (finding that firms with political connections in China are able to borrow more); Hongbin Li et al., Political Connections, Financing and Firm Performance: Evidence from Chinese Private Firms, 87 J. DEV. ECON. 283, 284 (2008) (finding that Communist Party membership helps private entrepreneurs in China to obtain loans from banks or other state institutions); Wubiao Zhou, Bank Financing in China’s Private Sector: The Payoffs of Political Capital, 37 WORLD DEV. 787, 788 (2008) (finding that membership in China’s legislative or semi-legislative organs helps private entrepreneurs obtain access to bank loans); Robert Cull et al., WORLD BANK, GOVERNMENT CONNECTIONS AND FINANCIAL CONSTRAINTS: EVIDENCE FROM A LARGE REPRESENTATIVE SAMPLE OF CHINESE FIRMS, Working Paper No. 6352, 7 (2013) (finding that government connections are associated with substantially less severe financial constraints at private firms in China)”).

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provide financial support as needed.497 These incentives provide a further opportunity for the state to direct private enterprises’ overseas investment in line with industrial policy.

The recent expansion of CCP committees in nominally private enterprises also enhances state influence over these enterprises’ decision-making – including outbound investment activities. As noted above, the Company Law of the People’s Republic of China authorizes the establishment of CCP committees in enterprises that are not state-owned. Recent statistics indicate that these Party committees now exist in “70 percent of some 1.86 million privately owned companies,”498 a sharp increase from 2014, when only 53.1 percent of China’s 1.60 million private companies had such committees.499

The increasing influence of the CCP has affected foreign enterprises that are located in China. 106,000 firms had set up Party units in 2016, compared to only 47,000 firms in 2011.500 As a result, several of these companies report “political pressure” to allow their internal Party committees greater input on business operations and investment decisions.501 Some foreign executives have reported that company investment decisions have already been made to satisfy internal CCP pressure.502 These efforts are so pervasive that at least one foreign industry group – the Delegations of Germany Industry and Commerce – released a public statement in November 2017 pushing back against attempts by the CCP “to strengthen their influence in wholly foreign owned German companies in China.” The statement concluded that German companies may choose to leave China or reconsider investment strategies if such attempts continued.503

Recent CCP documents indicate that these Party-building efforts are affecting all types of enterprises in China, not just SOEs and foreign-invested entities (FIEs).504 Although there are few public reports concerning Party-building efforts within Chinese companies that lack significant foreign investment or control, it is reasonable to suppose that the CCP is making

497 IC Guidelines § 4(3); International Cooperation Opinion § 33.
498 Michael Martina, Exclusive: In China, the Party’s Push for Influence inside Foreign Firms Stirs Fears, REUTERS, Aug. 24, 2017.
499 Xiaojun Yan & Jie Huang, Navigating Unknown Waters: The Chinese Communist Party’s New Presence in the Private Sector 37 CHINA REVIEW (2017).
500 He Huifeng, German Trade Body Warns Firms May Pull Out of China Over Communist Party Pressure, SOUTH CHINA MORNING POST, Nov. 29, 2017.
501 Michael Martina, Exclusive: In China, the Party’s Push for Influence Inside Foreign Firms Stirs Fears, REUTERS, Aug. 24, 2017.
502 Michael Martina, Exclusive: In China, the Party’s Push for Influence Inside Foreign Firms Stirs Fears, REUTERS, Aug. 24, 2017 (“A sales and marketing head in China for a major U.S. consumer goods firm said its party cell had recently become more active, and had pushed for locating a new facility in a district where the local government was promoting investment, a move the company made.”).
503 Press Release, Delegations of German Industry and Commerce, Increasing business challenges – Delegations of German Industry & Commerce in China concerned about growing influence of Chinese Communist Party on foreign business operations (Nov. 24, 2017), available at http://china.ahk.de/news/single-view/artikel/press-statement- increasing-business-challenges-delegations-of-german-industry-commerce-in-china-concerned-about-growing- influence-of-chinese-co/.
504 See e.g., Lucy Hornby, Communist party asserts control over China Inc., FINANCIAL TIMES, Oct. 3, 2017 (noting CCP’s push to increase influence on SOEs, private companies, and joint ventures); Provisions of the CCP Regarding On-Site Inspections (2017 Revision) (CCP Central Committee, July 1, 2017) (Calling on central, provincial and local CCP committees to increase inspection and supervision of all Party organizations under their jurisdiction, including those existing in enterprises).

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similar demands on these companies. 505 Unlike FIEs, Chinese companies likely have far less freedom to push back against such requests or to make them public.

Company executives often maintain close ties to the Party, either through their own membership in the Party or through cultivating political connections with influential Party cadres or organs in their locality.506 Likewise, industry associations may influence outbound investment behavior in line with government objectives. Industry associations exist for most of the technology-intensive manufacturing sectors of the Chinese economy, and most trace their origins to a government body. The members of these associations include SOEs as well as nominally private enterprises.507

c) State-backed Funds

The emergence of state-backed funds and investment companies represents an important new feature of China’s financial sector.

An early development in this regard was the establishment in 2007 of China’s sovereign wealth fund China Investment Corporation (CIC).508 CIC has received periodic capital injections from the foreign exchange reserves managed by SAFE.509 A large portion of its assets are located in its subsidiary, Central Huijin Investment Ltd., which holds stakes in China’s state-owned commercial banks, policy banks, securities companies, and insurance companies.510 Members of

505 According to a recent report, over 35 of China’s largest technology companies have “quietly instituted Party committees in recent years” but declined to give further specifics on the operational role of such committees. Emily Feng, Chinese Tech Groups Display Closer Ties with the Communist Party, FINANCIAL TIMES, Oct. 10, 2017.
506 U.S.-CHINA ECON. & SEC. REV. COMM’N, 2016 ANNUAL REPORT TO CONGRESS 102 (2016) (stating that, “In their research, Professor Zheng and Curtis Milhaupt, a professor at Columbia Law School, found 95 out of the top 100 private Chinese firms by revenue and eight out of the top ten Internet firms by revenue were founded or are controlled by a current or former member of a central or local political organization such as the People’s Congresses and People’s Political Consultative Conferences. These connections are integral to a private firm’s success, creating and reinforcing important networks to top banks, other leading SOEs, and government regulators.”).

507 U.S.-CHINA ECON. & SEC. REV. COMM’N, 2016 ANNUAL REPORT TO CONGRESS 102 (2016) (“Private companies are subjected to largely undefined regulations that dilute the rights of corporate owners. Take, for instance, China’s state-run industry associations, which were created in the 1990s amid mounting pressure for the government to separate its regulatory power from its business activities. State-run industry associations were meant to provide industrial coordination and private regulation, but they have become quasi-governmental entities: created and staffed by former government officials from defunct ministries, they supervise and coordinate the activities of firms whose ministries have been disbanded. Compulsory participation in these state-led industrial restructuring efforts, along with other forms of pressure from regulators to comply with government-favored policies, contribute to the state’s extralegal control over private enterprises.”).

508 CIC was established as a wholly state-owned enterprise pursuant to the PRC Company Law. Profile [Chinese], CHINA INVESTMENT CORP., available at http://www.china-inv.cn.
509 CIC received a $200 billion capital injection at its founding and a $30 billion capital injection in December 2011. CHINA INVESTMENT CORP., 2011 ANNUAL REPORT (2011); Lingling Wei, China’s CIC Works on Funding Mechanism, THE WALL STREET JOURNAL, Mar. 6, 2012.

510 Central Huijin Investment Ltd. stakes include Agricultural Bank of China, Industrial and Commercial Bank of China, and CDB. Shareholdings [Chinese], CENTRAL HUIJIN INVESTMENT LTD, http://www.huijin- inv.cn/wps/portal/!ut/p/a1/jZDLDoIwEEW_yMxYsOCygPKQ6oIQsRvSGIEmUoghLvx6q2FrcXY3OSf3ZkBABU LLp2rlpAYt758saH1EiuuwwAw52yPzccdPTkbiYGOAiwHCmCWulyOi6xNMoyCJvC1HTKnN9ws6- _jjGP7nW4CF_dkXsPSbAvLgIW9BjHLqVko3A1Td0N_qq4YzCGvDgSwArjMDthcubRz7sqxeeVOkir0BYO0FN g!!/dl5/d5/L2dBISEvZ0FBIS9nQSEh (last visited Nov. 20, 2017).

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CIC’s supervisory committee and executive board include current and former government officials.511

CIC is tasked with “implementing the diversification of investments of national foreign exchange reserves.”512 In fulfilling this role, CIC has not only made portfolio investments, but also purchased substantial equity shares in U.S. financial institutions and companies in the energy and resource sectors, including the U.S. energy company AES.513 In recent years, CIC has played a more indirect role by contributing capital to other funds. Notably, CIC contributed $550 million to the Asia-Germany Industrial Promotion Capital (AGIC), a private Chinese-owned investment fund based in Germany targeting investment in European “Industry 4.0”514 enterprises.515

Since 2007, state-backed funds and investment companies have proliferated, to the extent that these entities now constitute a central feature of China’s technology acquisition strategy. In a 2016 report, the Mercator Institute observes that:

Sovereign investment funds and governmental investment management companies play an increasing role in high-tech FDI. While these funds and their management often present themselves as private enterprises, the state’s active role is concealed behind an opaque network of ownership and funding structures. The State Council and local governments primarily use these funds and the expertise of private managers to make subsidies to Chinese enterprises more efficient. These funds are now becoming increasingly active with regard to investment in overseas markets.516

One of the largest state-backed funds is the National IC Fund. This fund was established in September 2014, soon after the June 2014 release of the IC Guidelines. The Semiconductor

511 CIC’s supervisory committee consists of representatives from MOF, PBOC, and other government organs. Its executive board is staffed primarily by former government officials. Executive Committee [Chinese], CHINA INVESTMENT CORP, http://www.china- inv.cn/wps/portal/!ut/p/a1/jZBNC4JAEIZ_Ucy02mrHVcsP3CJEsr3IEqkLuUpIh359Jl1dndvA8_DOvCCgAKHlW9 VyUJ2Wz98uaHlCils_wwQ5OyJz8cDPVkKYZ43AbR4IbWL0L7u_74cssp0UEW2XYBx4UeDsOWJM1_k4Mwz X- QZg4f9kAgz5YwB5cZ_XIHo5NBulqw6Kpmsf5V3DFYQxIbPMwNTwBJgqXLqxb_M8Lz5plcXqCxJDtLo!/dl5/d 5/L2dBISEvZ0FBIS9nQSEh/ (last visited Nov. 20, 2017).

512 Profile [Chinese], CHINA INVESTMENT CORP., http://www.china- inv.cn/wps/portal/!ut/p/a1/jZHRCoIwGIWfpQeI_U2ddjm1dOKKkMh2IyNSBzklpIuePpVunZ67H77DOfwHCZQjo eVHVbJXrZav8RakOAGBXZBBApwegXpw4GcrwdRxBuA-D0Q2Nvp96- 8PIhrbbgoAtoeBhX4cunsOwMg6P8yIgtF_Weg_AqvyDcDC_5IJMPQfAvCbB7xCopN9vVW6bFFet82zeGh0Q8K YkFlmYFpoAkwTLHU0d-AEdc11UP5Ny4wpRjc_2EaqQw!!/dl5/d5/L2dBISEvZ0FBIS9nQSEh/ (last visited Nov. 20, 2017.

513 See IACOB KOCH-WESER, OWEN HAACKE, U.S.-CHINA ECON. & SEC. REV. COMM’N, CHINA INVESTMENT CORPORATION: RECENT DEVELOPMENTS IN PERFORMANCE, STRATEGY, AND GOVERNANCE 29 (June 13, 2014); Eiichi Sekine, China Investment Corporation: Investment Performance in 2010 and Outlook, 3 NOMURA J. OF CAPITAL MARKETS 6 (Winter 2012).

514 “Industry 4.0” refers to the “fourth industrial revolution” resulting from the integration of the “internet of things” into the entire industrial value chain. See Bill Lydon, Industry 4.0: Intelligent and flexible production, 63 INTECH 12–17 (2016).
515 Jost Wübbeke, et al., MERICS, MADE IN CHINA 2025: THE MAKING OF A HIGH-TECH SUPERPOWER AND CONSEQUENCES FOR INDUSTRIAL COUNTRIES 53 (Dec. 2016).

516 Jost Wübbeke, et al., MERICS, MADE IN CHINA 2025: THE MAKING OF A HIGH-TECH SUPERPOWER AND CONSEQUENCES FOR INDUSTRIAL COUNTRIES 53 (Dec. 2016).

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Industry Association (SIA) reports that, to date, the National IC Fund has secured approximately $21 billion in funding.517 The fund has used these resources to support numerous technology-related outbound investments in the United States (see Section IV.C.2 for further discussion).

A media article by China’s official state-run news agency, Xinhua News, reposted on the website of the MOF, states that the National IC Fund will adopt a variety of investment forms, including equity investment, with a focus on the integrated circuit and microchip manufacturing industry, in order to “propel enterprises to upgrade their industrial capacity level and implement mergers, restructuring, and standardized enterprise management.” 518 The article further states that the IC Fund was established “under the guidance” of MIIT and MOF, and lists several large SOEs and state-owned financial institutions as key capital contributors, including:519

•   China Development Bank Capital, a subsidiary of the state-owned policy bank CDB;520
•   China National Tobacco Corp., a central SOE that administers a quasi-monopoly in China’s tobacco sector;521
•   China Mobile Communications Corporation, a central SOE and market leader in China’s telecommunications sector;522
•   Beijing E-Town International Investment and Development Co., Ltd. (Beijing E- Town), an investment company owned by the municipal government of Beijing,523 which has made several technology-related investments in the United States (see further discussion below and in Section IV.C.2);

  517 SEMICONDUCTOR INDUSTRY ASSOCIATION [hereinafter “SIA”], Submission, Section 301 Hearing 6 (Oct. 5, 2017).
  518 National Integrated Circuit Industry Investment Fund Officially Established [Chinese], XINHUA NEWS, Oct.14, 2014, available at http://www.mof.gov.cn/zhengwuxinxi/caizhengxinwen/201410/t20141014_1149902.html.
  519 National Integrated Circuit Industry Investment Fund Officially Established [Chinese], XINHUA NEWS, Oct.14, 2014, available at http://www.mof.gov.cn/zhengwuxinxi/caizhengxinwen/201410/t20141014_1149902.html.
  520 See China Development Bank Capital, available at http://www.cdb-intl.com/eng/about/about.htm. See also Capital Markets – Company Overview of China Development Bank Capital Corporation Ltd., BLOOMBERG, available at https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=115838167 (last visited Nov. 20, 2017) (“China Development Bank Capital Corporation Ltd. is an investment arm of China Development Bank specializing in direct, mezzanine, and fund of fund investments. For direct investments, the firm specializes in growth capital, pre-IPO investments, mergers & acquisition, and restructuring. It seeks to make direct investments in new energy, healthcare, environmental protection technologies, oil and gas supply, and industrials sectors.”).
  521 China Tobacco Overview [Chinese], State Tobacco Monopoly Bureau, available at www.tobacco.gov.cn/html/10/1004.html.
  522 China Mobile Communications Corporation is administered by SASAC. See SASAC, Enterprise List [Chinese], available at http://www.sasac.gov.cn/n2588035/n2641579/n2641645/index.html.
  523 Company Introduction [Chinese], BEIJING E-TOWN, http://www.etowncapital.com/comcontent_detail/columnsId=36&&i=2&comContentId=2.html, (last visited Nov.20, 2017).

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 



Shanghai Guosheng (Group) Co., Ltd., an investment company owned by the municipal government of Shanghai;

Tsinghua Unigroup, a company owned by Tsinghua University, a public university, which has attempted to make several technology-related investments in the United States (see above for further discussion);

China Electronics Technology Group Corporation, a state-owned defense enterprise established under the former Ministry of Electronics Industry (now part of MIIT), which describes itself as an “important state-owned backbone enterprise directly administered by the central government.”524

A 2017 corporate filing, relating to the acquisition of a National IC Fund-invested company, discloses further information on the National IC Fund’s shareholders. The list contains 19 entities, the largest of which are the government ministry MOF (25.95 percent), China Development Bank Capital (23.07 percent), China National Tobacco Corp. (14.42 percent), and Beijing E-Town (7.21 percent).525 The fund has used part of this capital to collaborate with its founding capital contributors. For example, in February 2015, the fund provided Tsinghua Unigroup with CNY 10 billion ($1.6 billion) in equity investment.526

The National IC Fund is part of an “Integrated Circuit Industry Technological Innovation Strategic Alliance” established in March 2017 “in conformity with […] the guiding spirit of General Secretary Xi Jinping.” 527 The objective of the alliance is to “implement the ‘Strong Internet Nation’ strategy, achieve breakthroughs in cutting-edge core technologies, and establish secure and controllable information technology [IT] systems.”528 The alliance comprises “62 leading enterprises, higher-education institutions, research academies, and social organizations,” and is supported by the Ministry of Science and Technology (MOST), NDRC, and MIIT.529

In the period since September 2014, numerous provinces and municipalities have established their own IC Funds, or received capital from the National IC Fund to establish other IC-

524 See CHINA ELECTRONICS TECHNOLOGY GROUP CORPORATION [Chinese], http://www.cetc.com.cn/zgdzkj/_300891/_300895/index.html (last visited Nov.20, 2017).
525 Zhejiang Wansheng Co., Zhejiang Wansheng Co., Ltd. Public Notice In Response to a Letter from the Shanghai Stock Exchange Requesting Information Disclosure Regarding the Company’s Issuance of Shares to Acquire Assets and Raise Supporting Funds in a Related Party Transaction [Chinese] (Code 603010, Public Notice 2017-042).
526 Press Release, Tsinghua Unigroup, Tsinghua Unigroup Receives CNY 10 Billion Investment from the National Integrated Circuit Investment Fund [Chinese] (Feb.14, 2015), available at http://www.unigroup.com.cn/newscenter/jtxw/2015/0214/138.html.
527 Press Release, China National Science and Technology Major Project, Integrated Circuit Industry Technological Innovation Strategic Alliance Officially Established [Chinese] (Mar. 22, 2017), available at http://www.nmp.gov.cn/gzxgz/jcdl/201703/t20170323_5031.htm.
528 Press Release, China National Science and Technology Major Project, Integrated Circuit Industry Technological Innovation Strategic Alliance Officially Established [Chinese] (Mar. 22, 2017), available at http://www.nmp.gov.cn/gzxgz/jcdl/201703/t20170323_5031.htm.
529 Press Release, China National Science and Technology Major Project, Integrated Circuit Industry Technological Innovation Strategic Alliance Officially Established [Chinese] (Mar. 22, 2017), available at http://www.nmp.gov.cn/gzxgz/jcdl/201703/t20170323_5031.htm.

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related funds.530 Reports on the establishment of IC Funds in Hubei,531 Fujian,532 and Anhui provinces533 indicate the high degree of Chinese government involvement in establishing the funds in order to meet national strategic objectives. According to the SIA, provincial and municipal IC funds have raised a staggering sum – more than $80 billion.534

In addition to funds that specifically target the IC sector, China has developed a number of other funds directed to all high-technology industries identified in the Made in China 2025 Notice and Made in China 2025 Roadmap. As reported by the U.S. Chamber of Commerce, these funds include:

(1) Advanced Manufacturing Industry Investment Fund – This fund received initial funding of CNY 20 billion ($3 billion), and aims to support all industries prioritized under the Made in China 2025 policy.

530 The full scope of sub-central IC Funds is difficult to ascertain, as there is no single list published a government website. A publication by the news website Sohu lists 13 IC Funds, located in the following localities (in the order they were established): (1) Beijing municipality (est. July 2014, capital CNY 30 billion ($4.9 billion)), (2) Hubei province (est. August 2015, capital CNY 30 billion ($4.8 billion)), (3) Shenzhen municipality (est. October 2015, capital CNY 20 billion ($3.2 billion)), (4) Guizhou province (est. December 2015, capital CNY 1.8 billion ($286 million)), (5) Hunan province (est. December 2015, CNY 5 billion ($795 million)), (6) Xiamen municipality (est. March 2016, capital CNY 16 billion ($2.4 billion)), (7) Sichuan province (est. March 2016, capital CNY 4 billion ($604 million)), (8) Guangdong province (est. June 2016, capital CNY 15 billion ($2.3 billion)), (9) Shaanxi province (est. August 2016, capital CNY 30 billion ($4.5 billion)), (10) Shanghai municipality (est. December 2016, capital CNY 28.5 billion ($4.3 billion)), (11) Nanjing municipality (est. December 2016, capital CNY 60 billion ($9.1 billion)), (12) Wuxi municipality (est. January 2017, capital CNY 20 billion ($3 billion)), and (13) Kunshan municipality (est. February 2017, capital 10 billion ($1.5 billion)). See A Compilation of Domestic Integrated Circuit Industry Funds in Each Locality [Chinese], SOHU, https://m.sohu.com/n/481699130/.

531 Hubei established an IC Fund in August 2015 with initial funding of CNY 30 billion ($4.4 billion). In March 2016, a “national storage equipment” base was established in Wuhan, the capital of Hubei, with support from the Hubei IC Fund and the National IC Fund. Press Release, Wuhan Municipal Government International and IT Office, Construction Begins to Establish National Storage Equipment Base in Our Municipality [Chinese] (Mar. 31, 2016), available at http://www.whwx.gov.cn/zhgl/gzdt/201603/t20160331_68082.html; Press Release, Hubei Province Science and Technology Office, Hubei Establishes CNY 30 billion Integrated Circuit Industry Investment Fund [Chinese] (Aug. 24, 2015), available at http://www.most.gov.cn/dfkj/hub/zxdt/201508/t20150821_121241.htm.

532 The Fujian Anxin Capital Fund was established in June 2016 with funding from the National IC Fund, with pledged capital of at least CNY 46.8 billion ($7.1 billion). Among the fund’s goals is to “promote domestic and foreign integrated circuit project acquisitions, technological R&D and the new construction and expansion of production lines […]” At the unveiling of the new fund, National IC Fund Chairman Wang Zhanfu stated: “On one hand, we can break through monopolies, protect national security, and implement national strategic objectives. On the other hand, we can optimize the industrial composition of domestic mobile integrated circuits, and promote the healthy development of industries including manufacturing, materials, and equipment.” Entering the Structure of the National Integrated Circuit ‘13th Five-year’ Strategy; Pujiang Recreates New Competitive Advantages [Chinese], PUJIANG NEWS, June 25, 2016, available at http://www.jinjiang.gov.cn/htm/20160625/89981.html.

533 The Anhui province IC Fund was established in May 2017 with CNY 30 billion ($4.4 billion) in initial funding. Capital contributors to the fund include the National IC Fund, the Chinese Academy of Sciences, the Anhui Province Investment Group, and the Hefei Industrial Investment Group. The fund’s activities will promote IC industry development in Anhui province through various methods, including equity infusions into subsidiary funds, equity investments, and industrial acquisitions. Anhui Province Establishes CNY 30 Billion Integrated Circuit Industrial Investment Fund [Chinese], XINHUA NEWS, May 19, 2017, available at http://www.gov.cn/xinwen/201705/19/content_5195371.htm.

534 SIA, Submission, Section 301 Hearing 6 (Oct. 5, 2017). 94

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(2) National Strategic Emerging Industries Investment Guiding Fund – This fund received initial funding of CNY 40 billion ($6 billion), and focuses on strategic emerging industries.

(3) Made in China 2025 Strategic Cooperation – This fund is a strategic partnership between CDB and the government ministry MIIT, with funding valued at CNY 300 billion ($44.8 billion). It provides financial support to implementing the Made in China 2025 policy. There are also province-level Made in China 2025 funds in Shaanxi, Gansu, and Sichuan provinces.535

Moreover, China relies on a web of state-backed investment companies to support outbound technology investments. A primary example is Beijing E-Town, which is owned by the Beijing municipal government. As noted above, Beijing E-Town is a capital contributor to the National IC Fund. According to a 2015 presentation by its General Manager, Wang Xiaobo, Beijing E-Town seeks to build a system of funds that includes not only the National IC Industry Fund, but also various province- and municipal-level funds, as well as smaller VC funds, in order to accelerate industrial clustering, incubate innovation, and cultivate an industrial ecosystem.536 As of the end of 2016, Beijing E-Town, on behalf of Beijing municipality, had committed CNY 10 billion ($1.5 billion) (and already disbursed CNY 1.6 billion ($242 million)) to the National IC Fund.537

A specific objective of Beijing E-Town is to cluster technology companies in the Beijing Economic-Technological Development Zone.538 A broader objective is to partner with domestic industry leaders to promote international acquisitions to acquire a number of key technologies in the IC industry – including mobile telecom base chips, RF chips, memory chips, insulated-gate bipolar transistors (IGBT) / power electronics, LCD driver chips, CPU chips, and MEMS sensor chips – in order to reduce China’s reliance on IC imports. 539 This broader objective aligns closely with government policies outlined in the IC Guidelines and other documents.

d) Military Civil Fusion

The Chinese government’s interest in securing advanced technology through outbound investment reflects both economic and national security objectives. The close relationship

535 U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 63-64 (2017).
536 Wang Xiaobo, Beijing E-Town General Manager, Presentation at TIF China 2015, Establishing an Investment Financing Platform; Promoting Development of the Integrated Circuit Industry [Chinese] (Mar. 2015), available at http://www.semi.org/en/sites/semi.org/files/data15/docs/Wangxiaobo_TIF.pdf.
537 CCXR 2017 Credit Report on Beijing E-Town International Investment and Development Co., Ltd. 12 [Chinese] (Credit Committee [2017] No. G229-1). See also Wang Xiaobo, Beijing E-Town General Manager, Presentation at TIF China 2015, Establishing an Investment Financing Platform; Promoting Development of the Integrated Circuit Industry [Chinese] (Mar. 2015), available at http://www.semi.org/en/sites/semi.org/files/data15/docs/Wangxiaobo_TIF.pdf.
538 Wang Xiaobo, Beijing E-Town General Manager, Presentation at TIF China 2015 Establishing an Investment Financing Platform; Promoting Development of the Integrated Circuit Industry [Chinese] (Mar. 2015), available at http://www.semi.org/en/sites/semi.org/files/data15/docs/Wangxiaobo_TIF.pdf.
539 CCXR 2017 Credit Report on Beijing E-Town International Investment and Development Co., Ltd. 15 [Chinese] (Credit Committee [2017] No. G229-1).

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between these objectives is reflected in the strategy of “military-civil fusion” (MCF), which is an important driver of government policy and outbound investment patterns. In 2016, China established the country’s first MCF fund, which allocated CNY 2 Billion ($ 302 million) to fund domestic projects and “overseas acquisitions.”540

Elevated as a national strategy by General Secretary Xi Jinping in 2014, MCF embodies China’s national strategic philosophy of coordinating the planning of economic development and national security (i.e. military-defense) to fully realize the rejuvenation of the Chinese nation.541 MCF emphasizes indigenous development, restriction of inbound FDI, and the absorption of foreign technologies and know-how in key sectors.542 The People’s Liberation Army (PLA) has drawn a direct link between MCF policy and overseas investment.543

In June 2017, General Secretary Xi called for focusing MCF on infrastructure, national defense related S&T, weapon and equipment procurement, talent cultivation, and implementing MCF in outer space, cyberspace, biology, new energy, and maritime space.544 Fundamentally, MCF captures China’s efforts to leverage its economic scale to more effectively capture and apply technological innovations in the commercial space in a national defense context.

As a national strategy, MCF cuts across economic and industrial development, talent acquisition, and military modernization plans. It calls for the development of integrated MCF information sharing platforms and MCF industry demonstration bases to facilitate S&T resource sharing and collaboration between state laboratories, the PLA, and enterprises, including foreign companies and Sino-foreign joint ventures.545

The State Administration for Science, Technology, and Industry for National Defense (SASTIND) oversees implementation of MCF policies within industry and coordinates MCF action across agencies and local governments. SASTIND’s 2016 and 2017 MCF Special Action Plans prioritize expanding defense industry collaborations, “guiding” social investment in military projects, including with private enterprises; implementing import substitution plans for key defense-related materials; establishing MCF investment funds to promote development of dual-use S&T industries; and supporting the “Going Out” for China’s defense industry groups, including enhancing cooperation with foreign governments and promoting the diffusion of China’s civilian nuclear technologies.546

540 Wang Yuxi, First Domestic MCF Transfer Results Fund is Established – Total Scale of 2 Billion RMB [Chinese], SICHUAN DAILY, Sept. 22, 2016, available at http://news.china.com.cn/2016-09/22/content_39347495.htm.
541 Xi Urges Efforts to Boost Integrated Military and Civilian Development, XINHUA NEWS, June 21, 2017, available at http://news.xinhuanet.com/english/2017-06/21/c_136381507.htm.

542 IGCC Report, 155.
543 Jiang Luming, Comprehensively Planning an Overall Strategy for National Security and Development [Chinese], PLA DAILY June 2, 2016, available at http://www.81.cn/gfbmap/content/2016-06/02/content_146372.htm.
544 Xi Urges Efforts to Boost Integrated Military and Civilian Development, XINHUA NEWS, June 21, 2017, available at http://news.xinhuanet.com/english/2017-06/21/c_136381507.htm.
545 See Description of National New Industrial Demonstration Base [Chinese], MIIT, available at http://sfjd.miit.gov.cn/BaseInfoAction!findListIndustry.action. See also Notice of the MIIT General Office on Organizing the Establishment of the 2015 “National New Industrialization Demonstration Base” (MIIT Gong Xin Ting Gui Han [2015] No. 319, May 12, 2015).
546 2017 SASTIND Military-Civilian Fusion Special Action Plan (State Administration of Science, Industry, and Industry for National Defense, published June 23, 2017); 2016 SASTIND Military-Civilian Fusion Special Action

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The State Council Notice on the Issuance of the Next Generation Artificial Intelligence Development Plan specifically calls for strengthening MCF in the artificial intelligence (AI) domain and developing “a new generation of AI technology as a support to command and decision-making, military deduction, defense equipment, and other applications.”547

C. Impact of Policies and Implementing Measures on Chinese Investment in the United States

This section considers how the policies and implementing measures outlined above impact Chinese investment in the United States.

Certain public hearing participants in the investigation have asserted that all Chinese investment in the United States is driven by market considerations – not government policy.548 According to these participants, government policies and measures are essentially irrelevant to outbound investment decisions.549 USTR does not find these statements persuasive.

Certain evidence in the record suggests that Chinese OFDI often reflects commercial considerations. These factors include commercial interest in acquiring technology and R&D facilities, financial diversification, acquisitions of consumer-oriented assets, localization of production inside tariff boundaries, and the possibility of a CNY devaluation.550

Plan (MOST, Guo Gong Ji [2016] No. 204, issued Mar. 16, 2016).
547 State Council Notice on Issuing the Next-Generation of Artificial Intelligence Development Plan § 3(4) (State Council, Guo Fa [2017] No. 35, issued Aug. 20, 2017). For full translation and analysis, see Graham Webster, et al., China’s Plan to ‘Lead in AI: Purpose, Prospects, and Problems, NEW AMERICA CYBERSECURITY INITIATIVE (Aug. 1, 2017), available at https://www.newamerica.org/cybersecurity-initiative/blog/chinas-plan-lead-ai-purpose- prospects-and-problems/.
548 See, e.g., Wang Guiqing, CCCME, Testimony, Section 301 Hearing 158-9 (Oct. 10, 2017) (business operations and acquisitions are “market oriented,” and “[t]here is no intervention by the Chinese government in companies’ business decisions”); John Tang, DHH, Testimony, Section 301 Hearing 154 (Oct. 10, 2017) (“Chinese companies including our firm have made billions of investments in the U.S. These investments are purely driven by market need. […] [P]olitics does not have an influence on the business decisions.”); CCCME, Submission, Section 301 Hearing 11 (Sept. 28, 2017) (stating that, “Chinese companies can choose any project independently and there are no government-motivated actions.”); DHH, Submission, Section 301 Hearing 7 (Sept. 28, 2017) (“Chinese acquisitions overseas (including intellectual property) are not driven by the government, but instead by market need.”); CCOIC, Submission, Section 301 Hearing 64-5 (Sept. 26, 2017) (stating that “Chinese companies’ investment and acquisition in U.S. companies is normal commercial behavior, with no government direction behind it.”).
549 One witness from the China General Chamber of Commerce testified that “every specific acquisition deal is decided by the companies based on their own business strategy and market opportunities […]”. Chen Xu, CHINA GENERAL CHAMBER OF COMMERCE [hereinafter “CGCC”], Testimony, Section 301 Hearing 147-48 (Oct. 10, 2017). But this witness also underscored the importance of Chinese government policy in shaping and directing outbound investment. See, e.g., id. at 176 (observing that, in the context of increased real estate investment into the United States, “China’s central bank and China’s central government, of course, will maybe redirect or reconcile the direction of China’s investment into the U.S. market. It is very necessary, I think.”); see also id. at 178.
550 RHODIUM, Submission, Section 301 Hearing 3 (Sept. 28, 2017); see also China Investment in Silicon Valley: The Rise of Chinese Investment in U.S. Tech Companies, CBINSIGHTS, available at https://www.cbinsights.com/reports/CB-Insights_China-in-US_webinar.pdf (last visited Nov. 20, 2017).

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IV. Outbound Investment

But the record also compels the conclusion that the state plays a vital role in shaping and facilitating outbound investment activity. As some participants observe, China is a managed economy,551 and the influence of the government is pervasive. As discussed above, a range of measures – such as control over foreign exchange, state-backed financing, and outbound investment approvals – give the state considerable ability to channel outbound investment to effect state policy objectives.552

Below, aggregate data and trends are examined, as well as specific transactions, to show how government policies and measures are shaping investment flows. USTR has found that, at multiple levels of government – central, regional, and local – the Chinese state has directed and facilitated investment in, and acquisition of, U.S. companies and assets in technology-intensive sectors and in U.S. technology centers such as Silicon Valley.

1. Chinese Investment Activity in the United States: Analysis of Data

China’s OFDI has accelerated over the decade since China began to articulate and implement the policies outlined in Section IV.B. China’s Ministry of Commerce (MOFCOM) reports that China’s OFDI flows totaled $145.7 billion in 2015 and $196.1 billion in 2016 – a new record, and a substantial increase over the $21.1 billion reported in 2006.553 Likewise, data from the United Nations Conference on Trade and Development (UNCTAD) shows that between 2009 and 2016, enterprises from China transacted 2,715 cross-border merger and acquisition (M&A) deals, compared to 1,250 deals in the 1990-2008 period.554

The growth of Chinese investment in the United States is evident in each of the primary sources of data: the U.S. Bureau of Economic Analysis (BEA), the China Global Investment Tracker (AEI), and the China Investment Monitor (Rhodium Group, or “Rhodium”). Based on data collected under a balance-of-payments approach, BEA estimates that flows of Chinese OFDI into the United States rose by 835 percent, from $1.1 billion in 2011 to $10.3 billion in 2016 (see Figure 1).555

551 See, e.g., James Lewis, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES [hereinafter “CSIS”], Submission, Section 301 Hearing 1-2 (Sept. 2017).
552 For these reasons, the suggestion by certain participants that the Chinese government simply provides “more information to the companies” to help them invest is not credible. Liu Chiao, CCOIC, Testimony, Section 301 Hearing 182 (Oct. 10, 2017).

553 See MOFCOM, NBS, and SAFE Jointly Issue Statistical Bulletin of China’s Outward Foreign Direct Investment, available at http://hzs.mofcom.gov.cn/article/date/201612/20161202103624.shtml, and the 2006 Statistical Bulletin of China’s Outward Foreign Direct Investment [Chinese], available at http://images.mofcom.gov.cn/hzs/accessory/200709/1190343657984.pdf.

554 Calculations based on UNCTAD, Annex Table 12. Number of Cross-border M&As by Region/Economy of Purchaser, 1990-2016, available at http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex- Tables.aspx.
555 Foreign Direct Investment in the United States, BEA (2017), https://www.bea.gov/iTable/index_MNC.cfm (last visited Oct. 25, 2017). BEA collects data from legally mandated surveys of foreign-owned affiliates operating in the United States. BEA data cover all completed FDI transactions based on the value of dollars “crossing the border” in a year, per the Balance of Payments Guidelines.

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2005-2009, greenfield investments accounted for 22.7 percent of OFDI.561 In contrast, from 2010 to 2016, greenfield investments made up only 7.6 percent of OFDI, whereas acquisitions accounted for 92.4 percent (see Figure 2).

Figure 2: Chinese OFDI in the United States: Greenfield vs. Acquisitions562

Chinese SOEs have played an important role in shaping these investment flows. From 2000 to 2016, 351 of the 1,395 acquisitions (25 percent) were carried out by government-owned enterprises, which accounted for 29 percent of the monetary value of these deals.563

Chinese OFDI also has grown significantly in technology- and innovation-related sectors targeted by Chinese industrial policies. Figure 3 reflects the growth in Chinese OFDI flows into the United States, with respect to seven sectors – automobiles, aviation, electronics, energy, health and biotechnology, industrial machinery (including robotics), and ICT. As this chart reflects, aggregate growth for this group of sectors has risen considerably, from $1.9 billion in 2005 to $9.8 billion in 2016. Annual investment totals were particularly high for this group during the 2013-2016 period, when the average annual OFDI was $6.9 billion.

Figure 3: Chinese OFDI in the United States: Technology-related Sectors564

561China Investment Monitor (2017), RHODIUM, http://rhg.com/interactive/china-investment-monitor (last visited Oct. 25, 2017).
562 China Investment Monitor (2017), RHODIUM, http://rhg.com/interactive/china-investment-monitor (last visited Oct. 25, 2017).

563 China Investment Monitor (2017), RHODIUM, http://rhg.com/interactive/china-investment-monitor (last visited Oct. 25, 2017). Rhodium defines “government-owned enterprises” as central SOEs under State-Owned Assets Supervision Administration and Commission, local SOEs controlled by provincial or municipal governments, sovereign investors, and any other entities that have more than 20 percent combined government ownership. Sources and Methodology (2017), RHODIUM, http://rhg.com/wp-content/themes/rhodium/interactive/china- investment-monitor/sources-and-methodology.html (last visited Oct. 31, 2017). See also Thilo Hanneman, Daniel H. Rosen, RHODIUM, CHINESE INVESTMENT IN THE UNITED STATES: RECENT TRENDS AND THE POLICY AGENDA 66 (Dec. 2016).

564 China Investment Monitor (2017), RHODIUM, http://rhg.com/interactive/china-investment-monitor (last visited Oct. 25, 2017). The sectors identified in the chart are intended to be a representative basket of technology-related

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Although trends vary from sector to sector, investment has generally risen significantly across each of the seven sectors:565

•   Automotive: Prior to 2014, the largest annual Chinese investment in the U.S. automotive industry was $474 million, in 2010. During the 2009-2013 period, the average annual investment inflow was $214 million. In 2014, investment flows in this sector increased to $771 million, and have risen each subsequent year ($915 million in 2015 and $1.0 billion in 2016).566
•   Aviation: According to Rhodium, prior to 2010 there was no Chinese investment in the U.S. aviation industry. In 2010, Chinese OFDI was $5 million in this sector, growing to $401 million in 2011. The annual average OFDI from 2012 through 2016 was $66 million. Chinese worldwide investment patterns are more pronounced in this sector. AEI reports that in the 2005-2013 period, there were only 7 investment transactions worldwide, totaling $2.5 billion; since the start of 2014, there have been 17, totaling $19.8 billion (of which $10.4 billion resulted from a single investment in the United States).567
•   Electronics: From 2009 through 2014, the annual average Chinese investment in the U.S. electronics industry was $49 million. In 2015, inflows increased nearly six-fold from the prior year to $349 million, and then increased twelve-fold over those levels to $4.2 billion, in 2016.
•   Energy: Before 2010, the largest annual Chinese investment in the U.S. energy industry was $212 million, in 2009. In the first decade of the 21st century, the annual average investment

  industries, drawn from Rhodium data, and not a comprehensive list. Other sectors not identified here also may have a nexus to technology or innovation.
  565 Unless otherwise indicated, data in this paragraph is drawn from China Investment Monitor (2017), RHODIUM, http://rhg.com/interactive/china-investment-monitor (last visited Oct. 25, 2017).

  566 China Global Investment Tracker (2018), AEI, available at http://www.aei.org/china-global-investment-tracker, (last visited Oct. 25, 2017).
  567 China Global Investment Tracker (2018), AEI, http://www.aei.org/china-global-investment-tracker, (last visited Oct. 25, 2017). AEI data includes announced deals, as well as completed transactions; it is possible that some of these transactions have not closed as of the date of publication of this report.

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inflow was a mere $52.6 million. In 2010, investment in this sector rose to $2.8 billion, and reached a high of $3.6 billion in 2013; levels declined thereafter. Chinese worldwide investment patterns show a clear shift to investment in alternative energy568 since 2013. AEI reports that, in the 2005-2013 period, China’s average annual worldwide investment in alternative energy was $673 million. This average rose to $4.2 billion during the 2014-2017 period. As reported by AEI, China’s only investments in the U.S. energy sector in 2016 and 2017 were in alternative energy, amounting to $150 million and $230 million, respectively.569

•   Health and Biotechnology: During the 2009-2013 period, annual Chinese investment in the U.S. health and biotechnology industry averaged $116 million. In 2014, investment in this sector grew rapidly to $1.0 billion, and remained at higher levels in 2015 ($900 million) and 2016 ($1.0 billion).
•   Information and Communication Technology (ICT): Before 2014, the largest annual Chinese investment in the U.S. ICT industry was $1.9 billion, in 2005. In 2009-2013, annual average investment inflow was $312 million. In 2014, investment in this sector rose to $5.9 billion and remained at higher levels in 2015 ($1.3 billion) and 2016 ($3.3 billion).
•   Industrial Machinery (including Robotics): The largest annual inflow of investment in industrial machinery and equipment was in 2010, in which investment totaled $218 million. Average annual investment fell to $15-$45 million in 2011-2014. Then, in 2015 and 2016, investment in this industry returned to near-record high levels of $214 million and $207 million, respectively.

2. Effect of State Policies and Implementing Measures on Chinese Acquisitions

Growth in Chinese technology investment coincides with an array of policy statements and implementing measures that are geared to promote technology transfer. As discussed in Section IV.B, above, over the past 10-15 years, the Chinese government has deployed a series of state industrial plans, approval mechanisms, and support measures designed to direct and facilitate outbound investment in technology-related sectors.570 The edifice of policies and implementing measures has grown more elaborate over time, and increasingly tailored to specific sectors. Likewise, aggregate Chinese OFDI in technology has witnessed a substantial increase over this period, particularly since 2009.

This apparent temporal relationship is particularly evident in certain sectors and industries, such as semiconductors. As discussed in Section IV.B.4, above, the Chinese government announced

568 “Alternative energy” includes non-fossil fuel energy investments, including renewable energy such as wind and solar, and nuclear energy. According to AEI data, most of the “alternative energy” investments fall under renewable energy, though there are some nuclear transactions, mostly in European countries. China Global Investment Tracker (2018), AEI, http://www.aei.org/china-global-investment-tracker, (last visited Oct. 25, 2017).

569 China Global Investment Tracker (2018), AEI, http://www.aei.org/china-global-investment-tracker, (last visited Oct. 25, 2017). AEI data includes announced deals, as well as completed transactions; it is possible that some of these transactions have not closed as of the date of this report’s publication.
570 As discussed in Section IV.B.1., the antecedents of this policy change were present as early as 2000 with the introduction of the “Going Out” strategy.

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in 2014 a policy to accelerate the development of the IC industry, including semiconductors. Prior to this announcement, global outbound Chinese investment in semiconductor manufacturing did not exceed $1 billion in a single year. In 2014, the value of announced Chinese acquisitions increased to $3 billion, and in 2015 surged to $35 billion.571

Thus, the aggregate data suggest a possible causal link between state policies and implementing measures, on the one hand, and trends in technology-driven OFDI, on the other. Indeed, given the scope and scale of these measures, it would be surprising if they had no effect on investment flows.

To further examine the impact of state measures on OFDI, USTR reviewed hundreds of reported transactions, in the following technology-intensive sectors: (1) aviation, (2) integrated circuits, (3) information technology, (4) biotechnology, (5) industrial machinery, (6) renewable energy, and (7) automotive. Several of these transactions are discussed in detail below and are presented as representative examples, The analysis is based on publicly available information concerning these transactions, and given the difficulty of obtaining information on the precise role of the government and CCP in individual cases, there are limits to the information available concerning each transaction.

Nonetheless, the evidence establishes that Chinese government policies and measures have had a significant effect on investment in each of the technology-intensive sectors examined. At multiple levels of government – central, regional, and local – the Chinese state has directed and facilitated the acquisition of U.S. companies and assets in these sectors. In the representative examples provided, the transactions align with state objectives and policies, and are often undertaken by SOEs that are, by definition, owned and controlled by the government. Even when undertaken by companies in which the government does not own an observable controlling stake, the transactions identified are frequently guided and directed by the state. CCP members often act as board members and officers of these companies, and are responsive to state directives. In addition, many of these transactions are funded by state-owned entities or banks, often in situations where comparable commercial financing would have been unavailable.

a) Aviation

Government Policies

Chinese investments in the U.S. general aviation (GA) industry illustrate the role of Chinese government policies in directing the commercial activities of Chinese companies.

Obtaining and developing cutting-edge technology in the aviation sector has long been an objective of the Chinese government. As discussed above, aviation technology has featured in numerous state planning documents, such as the MLP and the State Council Opinions on Deepening Reform of the National Defense Science and Technology Industry Investment System, the measure which called for development of National Defense Science & Technology Social

571 RHODIUM, Submission, Section 301 Hearing 4 (Sept. 28, 2017). Rhodium finds that there is a “readily apparent” nexus between Chinese industrial policy and outbound investment in the semiconductor industry.

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Investment Guidance Catalogue, which specifically targets aviation.572 Several five-year plans for China’s civil aviation industry underscore the government’s objective of developing this technology, 573 as do opinions and directives issued by government ministries such as MOST and SASTIND.574 These documents confirm that the pursuit of aviation technology is intended to fulfill both civil and military objectives.575

Reflecting these objectives, Chinese firms have acquired at least 11 U.S. aviation companies, established three joint ventures, and signed five cooperation agreements since 2005.576 The central state-owned Aviation Industry Corporation of China (AVIC)577 leads this investment effort, and, since 2010, has spent more than $3 billion acquiring U.S. and European aviation companies to address key gaps in general aviation technologies.578 As the successor to the Ministry of Aviation Industry, AVIC has implicit responsibility for China’s state-run aviation sector.579 AVIC is also the sole domestic supplier of military aircraft to the PLA.580

572 Notice on Issuing the National Medium- and Long-Term Science and Technology Development Plan Outline (2006-2020) (State Council, Guo Fa [2005] No. 44, issued Dec. 26, 2005); State Council Opinions on Deepening Reform of the National Defense Science and Technology Industry Investment System (State Council, Guo Han [2007] No. 9, issued Jan. 30, 2007); Ministry of Industry and Information Technology, Ministry of Science and Technology, National Defense Science & Technology Social Investment Guidance Catalogue (Release of 2010 Edition) (MIIT, MOST, issued Dec. 1, 2012).

573 China Civil Aviation Industry 13th Five-year Development Plan (CAAC, issued Mar. 2017); China Civil Aviation Industry 12th Five-year Development Plan (CAAC, issued Apr. 2011).
574 Provisional Measures on the Administration and Approval of Social Investment Projects of National Defense Science and Technology Industry (MIIT, Ke Kong Ji [2009] Document No. 1516, issued Dec. 30, 2009) manages approval of investments in the National Defense Science & Technology Social Investment Guidance Catalogue; Opinions Encouraging Technology Transfer and Innovation and Promoting the Transformation of the Growth Mode of Foreign Trade (MOFCOM, NDRC, MOST, GCA, GTA, SIPO, SAFE, Shang Fu Mao Fa [2006] No. 13, issued July 14, 2006); 2016 SASTIND Military-Civilian Fusion Special Action Plan (MOST, Guo Gong Ji [2016] No. 204, issued Mar. 16, 2016); 2017 SASTIND Military-Civil Fusion Special Action Plan (SASTIND, posted June 23, 2017).
575 2017 SASTIND Military-Civil Fusion Special Action Plan, ¶ 2, the action plan identifies three ways in which aviation technology is to be shared: (1) deepening “civil participation in the military” (2) advancing military transfers to civil, and (3) promoting military-civil resource sharing.
576 See Chad J. R. Ohlandt, et al., RAND, CHINESE INVESTMENT IN U.S. AVIATION, prepared for the U.S.-China Economic & Security Review Commission 45, 54-6, (Mar. 29, 2017).
577 AVIC is a state-owned industrial conglomerate that focuses on aerospace manufacturing but offers a wide range of goods and services, some of which extend beyond the aerospace sector. See About Us, AVIC, http://www.avic.com/en/aboutwebsite/contactus/index.shtml, (last visited Dec. 7, 2017) (“The Aviation Industry Corporation of China (AVIC) was founded on November 6th, 2008 through the restructuring and consolidation of the China Aviation Industry Corporation I (AVIC I) and the China Aviation Industry Corporation II (AVIC II). We are centered on aviation and provide complete services to customers in many sectors – from research and development to operation, manufacturing and financing. Our business units cover defense, transport aircrafts, helicopters, avionics and systems, general aviation, research and development, flight testing, trade and logistics, assets management, finance services, engineering and construction, automobiles and more. We have over 100 subsidiaries, nearly 27 listed companies and more than 450,000 employees.”). See also Company Overview of AVIC International Holding Corporation, BLOOMBERG, https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=5480121, (last visited Dec. 7, 2017). 578 Greg Levesque, Mark Stokes, POINTE BELLO, BLURRED LINES: MILITARY-CIVIL FUSION AND THE ‘GOING-OUT’ OF THE CHINESE DEFENSE INDUSTRY 36 (Dec. 2016).
579 See About Us, AVIC, http://www.avic.com/en/aboutwebsite/contactus/index.shtml (last visited Dec. 7, 2017).
580 Moody’s Assigns First-time Baa3 Rating to AVIC International, MOODY’S INVESTOR SERVICE (Aug. 30, 2013).

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AVIC is the focal point of China’s plans to develop a globally competitive aerospace industry. The company holds a 38.18 percent stake581 in Commercial Aircraft Corporation of China, Ltd. (COMAC), which was established by the Chinese government in 2008 for the purpose of designing and producing commercial aircraft, including the C919 single-aisle large commercial aircraft. The C919 project has served as a catalyst for COMAC, as well as smaller Chinese enterprises along the aerospace supply chain, to work with foreign companies on production tooling and manufacturing processes.582 This has allowed Chinese aerospace companies – including AVIC itself – to acquire foreign know-how and technology, an important step toward strengthening China’s domestic aerospace industry.

AVIC’s acquisitions have facilitated the transfer of engine, avionics, and production processes to China, resulting in so-called “breakthroughs” in domestic piston engine technology, solutions to production bottlenecks, and the development of advanced Unmanned Aerial Vehicles (UAV) manufacturing (for both Chinese military use and for export to foreign countries).583 Moreover, AVIC’s acquisitions have provided China with a fully integrated general aviation aircraft engine business encompassing marketing, sales, maintenance, repair, and overhaul (MRO), manufacturing, and R&D.584 In addition, AVIC acquisitions are supporting its key role in developing China’s general aviation infrastructure network585 in line with China’s civil aviation industry development plans.586

Chinese Investments in the U.S. General Aviation Sector

Since 2010, AVIC has acquired the following U.S. companies in the GA sector:

581COMMERCIALAIRCRAFTCORPORATIONOFCHINA,2016ANNUALREPORT 54[Chinese](Mar.2017).
582 See Micah Springut, Stephen Schlaikjer, David Chen, CENTRA Technology, Inc., China’s Program for Science and Technology Modernization: Implications for American Competitiveness, prepared for the U.S.-China Economic & Security Review Commission 124-25 (2011) (“China’s development of the single-aisle civil airliner C919 is one major project involving multiple multinational suppliers, from whom Chinese companies will learn advanced production tooling and manufacturing processes. Some of the Chinese companies producing subsystems with multinationals will be able to apply their know-how to the J-20 and other military models. Despite both government and corporate technology transfer restrictions and intellectual property guarantees, China’s experience working with General Electric and the German firm MTU in producing propulsion units for the C919 could help serve the development of more reliable military jet engines. AVIC subsidiaries, such as Xi’an Aero-engine PLC, also have joint ventures with engine manufacturers Pratt & Whitney, Rolls Royce and Balcke Durr.”). See also Chad J.R. Ohlandt, RAND, Implications of China’s Aerospace Industrial Policies 76 (testimony presented before the U.S.- China Economic and Security Review Commission on Apr. 27, 2016).
583 The Heart of China’s Unmanned Aerial Vehicles Will Be Domestic-Made: Precision Shot to Acquire the Top- Tier Manufacturers in the United States and Germany [Chinese], PHOENIX MILITARY NEWS, Dec. 6, 2016, available at http://news.ifeng.com/a/20161206/50370941_0.shtml; Lin Feng, China’s ‘Trojan Horse’ has Entered the U.S. Military Enterprises, VOICE OF AMERICA MANDARIN SERVICE, Apr. 11, 2017.
584 Press Release, Continental Motors, AVIC International Announces the Formation of Continental Motors Group and Expansion into China, Continental Motors (Apr. 10, 2014) available at http://www.continentalmotors.aero/xPublications/News%20Releases/AVIC%20International%20announces%20the %20Founding%20of%20the%20Continental%20Motors%20Group.
585 Cirrus Building China GA Infrastructure, AVIATION INTERNATIONAL NEWS, Apr. 12, 2017.
586 China Civil Aviation Industry 12th Five-year Development Plan (CAAC, issued Apr. 2011); China Civil Aviation Industry 13th Five-year Development Plan (CAAC, issued Mar. 2017).

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Outbound Investment





 

 

Epic Aircraft—acquired by China Aviation Industry General Aircraft Co. (CAIGA), an AVIC subsidiary, for $4.3 million in April 2010 after a bankruptcy judge approved the asset purchase agreement.587 According to the court, CAIGA’s bid was the highest and best offer.588 The acquisition included Epic intellectual property and technology.589

Teledyne Technologies (Continental Motors and Mattituck Services)—acquired by Technify Motors USA Inc., a subsidiary of AVIC International Holding Corporation, in December 2010 for $186 million.590 Continental Motors591 is a pioneer in the area of full authority digital engine control (FADEC) technology.592

Cirrus Aircraft—acquired by CAIGA in February 2011 for $210 million.593 At the time of purchase, Cirrus was the second largest manufacturer of GA aircraft and the largest manufacturer of piston-engine powered GA aircraft.594

Southern Avionics & Communications Inc.—acquired by Continental Motors Group in November 2014.595 Southern Avionics is a leader in avionics sales, installation, and service. The company represents most major global avionics manufacturers through distribution or representative agreements.596

United Turbine and UT Aeroparts—acquired by Continental Motors Group in January 2015.597 United Turbine and UT Aeroparts provide turbine aircraft engine and accessory MRO services.

Align Aerospace—acquired by AVIC International in April 2015.598 Align provides supply chain services for the aerospace industry and distributes fasteners and other hardware for aerospace original equipment manufacturers.

587 Chinese Firm to Buy Epic Assets, AVIATION INTERNATIONAL NEWS, Apr. 30, 2010.
588 Chinese Firm to Buy Epic Assets, AVIATION INTERNATIONAL NEWS, Apr. 30, 2010.
589 Chinese Firm to Buy Epic Assets, AVIATION INTERNATIONAL NEWS, Apr. 30, 2010.
590 Press Release, Teledyne Technologies Inc., Teledyne Technologies Agrees to Sell Teledyne Continental Motors to AVIC International (Dec.14, 2010).

591 See Continental Motors Inc., BLOOMBERG, https://www.bloomberg.com/profiles/companies/0116585D:US- continental-motors-inc (last visited Dec. 7, 2017) (stating that, “Continental Motors, Inc. produces aviation products. The Company manufactures fuel injected, turbocharged, radial, and horizontally opposed cylinder aircraft piston engines for the aerospace industry.”).
592 Bill Cox, FADEC Comes of Age, PLANE & PILOT, Feb. 9, 2010.
593 Norihiko Shirouzu, China to Buy Small U.S. Planemaker, WALL STREET JOURNAL, Mar. 3, 2011.
594 Chad J. R. Ohlandt, et al., RAND, CHINESE INVESTMENT IN U.S. AVIATION, prepared for the U.S.-China Economic and Security Review Commission 49 (Mar. 29, 2017).
595 Press Release, Continental Motors, Continental Motors Group Announces Completed Acquisition of Southern Avionics and Communications (Nov. 24, 2014).
596 Press Release, Continental Motors, Continental Motors Group Announces Completed Acquisition of Southern Avionics and Communications (Nov. 24, 2014).
597 Press Release, Continental Motors, Continental Motors Services Acquires United Turbine and UT Aeroparts Corporations (Feb. 2, 2015).
598 Juliet Van Wagenen, AVIC Looks to Up Global Push with Align Aerospace Acquisition, AVIATION TODAY, Apr. 2, 2015.

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 Danbury Aerospace—acquired by Continental Motors Group in April 2015.599 Danbury Aerospace specializes in engine design and certification.600 In October 2016, Danbury operations in San Antonio were closed, resulting in layoffs of 57 people.601

AVIC International Holding Corporation subsidiary Technify Motors GmbH acquired German- based Thielert Aircraft in July 2013.602 Thielert’s 1.7L engine powered the MQ-10C Gray Eagle UAV, a derivative of the General Atomics Predator drone used by the U.S. Air Force (a defense article that is export controlled by the International Traffic in Arms Regulations, ITAR).603 This engine also has been used in the military versions of the Diamond Aircraft DA42,604 a largely composite twin-engine aircraft used for both manned and unmanned surveillance.605

AVIC’s GA acquisitions in the United States align with Chinese government aviation S&T and industrial development policy directives. For example, the timing of AVIC’s acquisition of U.S. piston engine manufacturers follows the December 2009 release of the National Defense Science and Technology Social Investment Guidance Catalogue.606 Promulgated by MIIT, which regulates the defense industry, the catalogue “guides” domestic investment in defense S&T assets, including UAV manufacturing, and piston engine development and manufacturing.607 The use of the term “social investment608” in Chinese denotes the pursuit of investments which

599 Press Release, Continental Motors, Continental Motors to Purchase Assets from Danbury Aerospace (May 4, 2015).
600 Press Release, Continental Motors, Continental Motors to Purchase Assets from Danbury Aerospace (May 4, 2015). Continental Motors states: “Danbury Aerospace is a holding company that has led the industry in parts manufacturing authorization (PMA) and experimental engine technologies for the certified and experimental piston engine powered segments of the General Aviation market. […] Its capabilities include PMA design and certification, engine design and certification, operation of a Part 145 Repair Station for piston aircraft engines and parts, manufacturing process design, manufacturing system design and production and sales, service and support.”

601 Rye Druzin, Aircraft Engine Manufacturer Shutters San Antonio Factory, Lays Off 56, MY SAN ANTONIO, Oct. 12, 2016.
602 Press Release, Continental Motors, AVIC International Holding Corporation Acquires the Assets of Thielert Aircraft Engines Out of Bankruptcy (July 22, 2013).

603 DEPARTMENT OF DEFENSE, SELECTED ACQUISITION REPORT: MQ-1C UAS GRAY EAGLE 33 (Dec. 31, 2010).

604

EVENTS ASSOCIATED WITH AN ENGINE MALFUNCTION; THIELERT TAE 125 ENGINES 7
available at https://www.bea.aero/etudes/thielert.tae125.engines/thielert.tae125.engines.pdf.
605 Technify Motors GmbH key customers are: manufacturers of new piston engine-powered aircraft; fleets and owner/operators of existing aircraft that would convert from gasoline-fueled engines to diesel-fueled engines; owner/operators requiring maintenance and spare parts for their diesel-fueled aircraft engines; and developers/manufacturers/users of UAVs. AVIC International Holding (HK) Limited notification to the Hong Kong Stock Exchange, Very Substantial Acquisition and Connected Transaction and Application for Whitewash Waiver and Appointment of Independent Financial Adviser and Clawback Offer by AVIC International (HK) Group Limited (Sept. 19, 2017).
606 AVIC’s investment activities in the United States significantly ramped up following the release of the National Defense Science & Technology Social Investment Guidance Catalogue, as well as other state aviation industrial development policies and the establishment of an aviation industry investment fund, see Mao Haifeng, China’s First National Level Aviation Industry Fund Administration Lists Operations, XINHUA NEWS, June 28, 2009, available at http://www.gov.cn/jrzg/2009-06/28/content_1352458.htm (last visited Feb. 12, 2018).
607 The catalogue specifically identifies manufacturing of unmanned combat aircraft parts, communications, and electronic warfare platforms (§ 5.1.1) and the development and manufacturing of aviation piston engines (§ 5.3.1) as targets for social investment. See National Defense Science & Technology Social Investment Guidance Catalogue. 608 English translation of Chinese term shehui touzi.

Civil Aviation Safety Investigation Authority, Ministry of Ecology, Sustainable Development, and Energy

(France),

107

(2014).

IV. Outbound Investment

create a positive return to society, including R&D investments that generate a social or public benefit, rather than purely profit.609

AVIC’s pursuit of state policies is evident in its public statements:

•   During a February 2009 meeting between officials from AVIC and the Civil Aviation Administration of China (CAAC), Li Jian, then deputy director of CAAC, stressed that the development of the GA industry was far from meeting central government requirements of economic and social development. 610 In response, then AVIC officer, Xu Zhanbin, replied that the company would promote institutional and technological innovation as soon as possible to achieve breakthroughs in the GA market and effectively promote industry development.611
•   AVIC president Tan Ruisong has noted that the group’s “coordinated development” of its non-aviation civilian business and military business embodies China’s Military-Civil Fusion (MCF) strategy, as well as aviation industry policies.612 AVIC chairman, Lin Zuoming, publicly stated that “AVIC always regards civil-military integration as its historical mission.”613
•   In July 2010, AVIC, the Tianjin Municipal Government, and China Construction Bank set up a CNY 20 billion ($3 billion) private equity fund to acquire dual-use technology companies and invest in defense R&D projects that support the restructuring and development of China’s aviation industry.614 When announcing the launch of this fund, AVIC specifically referenced restructuring in the U.S. GA market, suggesting that one objective of this fund was to further acquisitions in the U.S. market.615

  Reflecting the extent of government support of AVIC’s commercial activities, both China Exim and PBC have provided financing for AVIC acquisitions in the United States.616

  AVIC International is in the process of transferring ownership of its U.S. GA subsidiaries (i.e.,

  609 State Council Guiding Opinions on Innovating Systems for Key Sectors to Encourage Social Investment (State Council, Guo Fa [2014] No. 60, issued Nov. 24, 2014, effective Nov. 14, 2014).
  610 Press Release,

  Feb. 18, 2009), available at http://www.caac.gov.cn/XWZX/MHYW/200902/t20090218_12250.html.

  611 Press Release,

  Feb. 18, 2009), available at http://www.caac.gov.cn/XWZX/MHYW/200902/t20090218_12250.html.

  612 Convening of AVIC 2016 Non-Aviation Business & Equity Investment Work Meeting [Chinese], AVIC, (Apr. 23 2016), available at http://www.avic-intl-capital.com/detail.aspx?cid=1577&siteid=27568.
  613 AVIC, TOGETHER WITH US: SOCIAL RESPONSIBILITY REPORT 2014 8 (June 2015).
  614 China’s First Aviation Industry Support Fund Established [Chinese], CHINA AVIATION NEWS, July 12, 2010, available at http://www.avic.com/cn/xwzx/jqyw/390801.shtml.

  615 China’s First Aviation Industry Support Fund Established [Chinese], CHINA AVIATION NEWS, July 12, 2010, available at http://www.avic.com/cn/xwzx/jqyw/390801.shtml.
  616 AVIC International Holding (HK) Limited notification to the Hong Kong Stock Exchange, Very Substantial Acquisition and Connected Transaction and Application for Whitewash Waiver and Appointment of Independent Financial Adviser and Clawback Offer by AVIC International (HK) Group Limited (Sept. 19, 2017).

Civil Aviation Administration of China, CAA and AVIC Collaborate on the Future of General

Aviation [Chinese] (

Civil Aviation Administration of China, CAA and AVIC Collaborate on the Future of General

Aviation [Chinese] (

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Continental Motors and Cirrus) to a separate AVIC-owned company.617 According to AVIC, the “proposed reorganization is being contemplated by the Company as part of a wider restructuring campaign being implemented by SASAC.”618 This announcement underscores the extent to which the Chinese government oversees and directs, through SASAC, the commercial activities of SOEs operating in the United States.

AVIC Technology Transfer—Achieving Breakthroughs

AVIC’s U.S. GA acquisitions and its transfer of technology appear to conform to a government- prescribed policy of introducing, digesting, absorbing, and re-innovating foreign acquired technology (see IDAR policy discussed in Section I). Research conducted by a Chinese defense industry analyst documents this IDAR process in relation to AVIC’s GA engine acquisitions in the United States and Europe.619 According to this report, piston engine technology transferred to China, including Chinese universities, from several sources – including Continental Motors, Thielert Aircraft, and Cirrus Aircraft, as well as joint development agreements covering single engine turboprops and piston engines with Cessna – has led to “breakthroughs” in piston engine technology and production bottlenecks.620 Key breakthroughs were achieved in gasoline- modified heavy oil technology, electric fuel injection technology, and turbocharging.621

U.S. companies acquired by AVIC now provide ongoing R&D and fill critical nodes in China’s GA aircraft and piston engine manufacturing industry. For example, in April 2014, AVIC announced the consolidation of “its aircraft engine businesses under a single corporate structure” — Hong Kong incorporated Continental Motors Group Limited (CMG).622 Following the incorporation of CMG, AVIC expanded its GA technology portfolio by acquiring Danbury Aerospace, United Turbine & UT Aeroparts, and Southern Avionics and Communications.623 According to a company press release, these acquisitions were driven by AVIC’s “special place

617 AVIC International Holding (HK) Limited notification to the Hong Kong Stock Exchange, Potential Continuing Connected Transactions (Oct. 24, 2017).
618 AVIC International Holding (HK) Limited notification to the Hong Kong stock exchange, Very Substantial Acquisition and Connected Transaction and Application for Whitewash Waiver and Appointment of Independent Financial Adviser and Clawback Offer by AVIC International (HK) Group Limited 15 (Sept. 19, 2017).

619 The Heart of China’s Unmanned Aerial Vehicles Will Be Domestic-Made: Precision Shot to Acquire the Top- Tier Manufacturers in the United States and Germany [Chinese], PHOENIX MILITARY NEWS, Dec. 6, 2016, available at http://news.ifeng.com/a/20161206/50370941_0.shtml.
620 The Heart of China’s Unmanned Aerial Vehicles Will Be Domestic-Made: Precision Shot to Acquire the Top- Tier Manufacturers in the United States and Germany [Chinese], PHOENIX MILITARY NEWS, Dec. 6, 2016, available at http://news.ifeng.com/a/20161206/50370941_0.shtml.
621 The Heart of China’s Unmanned Aerial Vehicles Will Be Domestic-Made: Precision Shot to Acquire the Top- Tier Manufacturers in the United States and Germany [Chinese], PHOENIX MILITARY NEWS, Dec. 6, 2016, available at http://news.ifeng.com/a/20161206/50370941_0.shtml.
622 Press Release, Continental Motors, AVIC International Announces the Formation of Continental Motors Group and Expansion into China (Apr. 10, 2014), available at http://www.continentalmotors.aero/xPublications/News%20Releases/AVIC%20International%20announces%20the %20Founding%20of%20the%20Continental%20Motors%20Group.
623 Press Release, Continental Motors Group Announces Completed Acquisition of Southern Avionics and Communications (Nov. 24, 2014); Press Release, Continental Motors, Continental Motors Services Acquires United Turbine and UT Aeroparts Corporation (Feb. 2, 2015); Press Release, Continental Motors, Continental Motors to Purchase Assets from Danbury Aerospace (May 4, 2015).

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and obligation to bring general aviation products to China.”624

Consolidation of AVIC-acquired GA assets in the United States has provided the company a fully integrated GA aircraft engine marketing, sales, MRO, manufacturing, and R&D business.625 As AVIC notes, “CMG is the only global player capable of designing, manufacturing and maintaining both gasoline and diesel piston engines.”626

b) Integrated Circuits

Government Policies