A New Trump Memo Could Disrupt US-China Investment and Commercial Ties

First in a new column: "China Perspectives by Sinology" from Andy Rothman, founder and CEO, Sinology LLC

Note from Kaiser: I’m delighted to present a new column that will appear regularly here: China Perspectives by Sinology from my good friend Andy Rothman, Founder and CEO, Sinology LLC.

Andy’s China journey began in 1980 when he arrived as a student in post-Mao China – just in time to witness Deng Xiaoping's reforms and, notably, the country's first rock concert by Wham! After 17 years as a US diplomat, including a front-row seat to China-Taiwan tensions in the '90s, Andy pivoted to the private sector in 2000. His 20+ years in China and subsequent role at Matthews Asia cemented his reputation as a leading China strategist. Now heading Sinology LLC, Andy brings 40 years of insights to institutional investors and corporate directors navigating the complexities of U.S.-China relations and the world's second-largest economy.

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Investors and directors should pay careful attention to Trump’s new “America First Investment Policy,” which has the potential to significantly disrupt commercial connections between the world’s two largest economies.

It is possible that Trump intends to only use these measures, published on February 21, as leverage in upcoming negotiations with Xi Jinping. After all, last month Trump said, “I like President Xi very much. I’ve always liked him…. We always had a great relationship… and we look forward to doing very well with China and getting along with China.”

But, if Trump and Xi fail to reach agreement on a process for putting the relationship on a more constructive path, implementation of the ideas set out in Trump’s memorandum would have dramatic consequences for investors and a broad range of companies.

Let’s take a look at key language in Trump’s memo to his cabinet.

Trump describes the People’s Republic of China as an adversary. “PRC-affiliated investors are targeting the crown jewels of United States technology, food supplies, farmland, minerals, natural resources, ports, and shipping terminals. . . The PRC is also increasingly exploiting United States capital to develop and modernize its military, intelligence, and other security apparatuses…”

“The PRC exploits United States investors to finance and advance the development and modernization of its military. . . [by] selling to American investors securities that trade on American and foreign public exchanges; lobbying United States index providers and funds to include these securities in market offerings…”

“The United States will use all necessary legal instruments, including the Committee on Foreign Investment in the United States (CFIUS), to restrict PRC-affiliated persons from investing in United States technology, critical infrastructure, healthcare, agriculture, energy, raw materials, or other strategic sectors. . . [the Administration will seek to] restrict foreign adversary access to United States talent and operations in sensitive technologies (especially artificial intelligence), and to expand the remit of “emerging and foundational” technologies addressable by CFIUS.”

Trump wrote that his Administration will “consider new or expanded restrictions on United States outbound investment in the PRC in sectors such as semiconductors, artificial intelligence, quantum, biotechnology, hypersonics, aerospace, advanced manufacturing, directed energy, and other areas implicated by the PRC’s national Military-Civil Fusion strategy… my Administration will consider applying restrictions on investment types including private equity, venture capital, greenfield investments, corporate expansions, and investments in publicly traded securities, from sources including pension funds, university endowments, and other limited-partner investors. It is past time for American universities to stop supporting foreign adversaries with their investment decisions, much as they should stop granting university access to supporters of terrorism.”

“We will review whether to suspend or terminate the 1984 United States-The People’s Republic of China Income Tax Convention… United States investors will invest in the future of America, not the future of the PRC.”

The Administration will “determine if adequate financial auditing standards are upheld for companies covered by the Holding Foreign Companies Accountable Act . . . [and] review the variable interest entity [VIE] and subsidiary structures used by foreign-adversary companies to trade on United States exchanges.” [Note that this language suggests Trump is considering forcing the delisting of Chinese companies from US exchanges.]

“For purposes of this memorandum, the term “foreign adversaries” includes the PRC, including the Hong Kong Special Administrative Region and the Macau Special Administrative Region; the Republic of Cuba; the Islamic Republic of Iran; the Democratic People’s Republic of Korea; the Russian Federation; and the regime of Venezuelan politician Nicolás Maduro.”

Full text of Trump’s memo here.