Thursday 17 August 2017

US set for crackdown on Chinese investment in cutting-edge firms

US Defence Secretary Jim Mattis has called the Committee on Foreign Investment in the United States 'outdated'
US Defence Secretary Jim Mattis has called the Committee on Foreign Investment in the United States 'outdated'

The United States appears poised to heighten scrutiny of Chinese investment in Silicon Valley to better shield sensitive technologies seen as vital to US national security, current and former US officials have told Reuters.

Of particular concern is China's interest in fields such as artificial intelligence and machine learning, which have increasingly attracted Chinese capital in recent years. The worry is that cutting-edge technologies developed in the United States could be used by China to bolster its military capabilities and perhaps even push it ahead in strategic industries.

The US government is now looking to strengthen the role of the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee that reviews foreign acquisitions of US companies on national security grounds.

An unreleased Pentagon report, viewed by Reuters, warns that China is skirting US oversight and gaining access to sensitive technology through transactions that currently don't trigger CFIUS review. Such deals would include joint ventures, minority stakes and early-stage investments in startups.

"We're examining CFIUS to look at the long-term health and security of the US economy, given China's predatory practices" in technology, said a Trump administration official, who was not authorised to speak publicly.

Defence Secretary Jim Mattis weighed into the debate on Tuesday, calling CFIUS "outdated" and telling a Senate hearing: "It needs to be updated to deal with today's situation."

CFIUS is headed by the Treasury Department and includes nine permanent members including representatives from the departments of Defence, Justice, Homeland Security, Commerce, State and Energy. The CFIUS panel is so secretive it normally does not comment after it makes a decision on a deal.

Under former President Barack Obama, CFIUS stopped a series of attempted Chinese acquisitions of high-end chip makers.

Senator John Cornyn, the No. 2 Republican in the Senate, is now drafting legislation that would give CFIUS far more power to block some technology investments, a Cornyn aide said.

"Artificial intelligence is one of many leading-edge technologies that China seeks and that has potential military applications," said the Cornyn aide, who declined to be identified.

"These technologies are so new that our export control system has not yet figured out how to cover them, which is part of the reason they are slipping through the gaps in the existing safeguards," the aide said.

The legislation would require CFIUS to heighten scrutiny of buyers hailing from nations identified as potential threats to national security. CFIUS would maintain the list, the aide said, without specifying who would create it.

Cornyn's legislation would not single out specific technologies that would be subject to CFIUS scrutiny. But it would provide a mechanism for the Pentagon to lead that identification effort, with input from the US technology sector, the Commerce Department, and the Energy Department, the aide said.

James Lewis, an expert on military technology at the Centre for Security and International Studies, said the US government is playing catch-up.

"The Chinese have found a way around our protections, our safeguards, on technology transfer in foreign investment. And they're using it to pull ahead of us, both economically and militarily. I think that's a big deal," Lewis said.

But some industry experts warn that stronger US regulations may not succeed in halting technology transfer and might trigger retaliation by China, with economic repercussions for the United States.

In Beijing, Chinese Foreign Ministry spokesman Lu Kang said Chinese investment should not be "politically overinterpreted" or "interfered with politically".

"We hope the United States can provide a good environment for Chinese companies investing in the United States," Lu told a regular news briefing on Wednesday.

China made the United States the top destination for its foreign direct investment in 2016, with $45.6bn in completed acquisitions and greenfield investments, according to the Rhodium Group, a research firm. Investment from January to May 2017 totalled $22bn, which represented a 100pc increase against the same period last year, it said.

"There will be a significant pushback from the technology industry" if legislation is overly aggressive, Rhodium Group economist Thilo Hanemann said.

Concerns about Chinese inroads into advanced technology come as the US military looks to incorporate elements of artificial intelligence and machine learning into its drone program.

Project Maven, as the effort is known, aims to provide some relief to military analysts who are part of the war against Islamic State.

These analysts currently spend long hours staring at big screens reviewing video feeds from drones as part of the hunt for insurgents in places like Iraq and Afghanistan.

The Pentagon is trying to develop algorithms that would sort through the material and alert analysts to important finds, according to Air Force Lieutenant General John NT. "Jack" Shanahan, director for defence intelligence for warfighting support.

"A lot of times these things are flying around(and)... there's nothing in the scene that's of interest," he told Reuters.

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