September 18th, 2020


Congress wary of Chinese deal for Chicago Exchange

Josh Rogin

By Josh Rogin Bloomberg View

Published Feb. 18, 2016

Dozens of members of Congress plan to ask the Obama administration to review the planned acquisition of the Chicago Stock Exchange by a Chinese firm, to assess whether it poses a national security risk or a risk to the companies traded on the exchange.

The Chicago Stock Exchange announced this month that it would be sold to a consortium led by the Chongqing Casin Investment Group of China, a move that would inject needed resources into the exchange and give the Chinese firm a foothold in the $22 trillion U.S. equities marketplace. Chinese state media reported that the deal was meant to eventually bring more Chinese firms into the U.S. market and that U.S. technology could be used to open new exchanges in China, a potential win- win for both sides.

But the exchange's CEO, John Kerin, has said that he doesn't know who owns Chongqing Casin and that the Chinese government may be a minority stakeholder, as it is in most large Chinese businesses.

On Wednesday, a group of several dozen U.S. lawmakers plan to formally request that the Obama administration conduct a national security review of the deal through a process known as the Committee on Foreign Investment in the United States, or CFIUS.

"The American market has little information about CCEG, and it shares many of the traditional opaque qualities of a Chinese company," said a letter from 45 Republicans and one Democrat to the members of the CFIUS board, which is led by Treasury Secretary Jack Lew. "While it is unclear the level of influence the state holds over CCEG, the firm is involved in a number of important Chinese sectors that would likely require close ties to the state."

The company was created by the Chinese government in 1997 to absorb state-controlled assets, the lawmakers wrote, and the firm's chairman Shengju Lu still has ties to the government of Chongqing, a city in southwestern China. The letter asks the administration to rigorously investigate the company's ties to the Chinese government.

"Should you determine CCEG maintains a close relationship with the Chinese government - and therefore the Chinese military - we would urge CFIUS to deny this acquisition," the lawmakers wrote.

Rep. Robert Pittenger, R-North Carolina, who initiated the letter, told me in an interview that if the Chinese government had influence over U.S. markets, it could manipulate them to the advantage of Chinese companies or to artificially benefit the Chinese economy.

"It's clearly of a concern they could play upon our own stock exchange," he said. "The financial markets, the stock exchanges, they have a critical impact on our nation's economy."

He also sees risk in giving a Chinese firm access to the exchange, because it could also have access to proprietary information that U.S. companies share with the exchange in order to do business, and he said such access would constitute a "major cyber security concern."

Several legal experts who have experience dealing with CFIUS cases told me that the Chinese acquisition of the Chicago Stock Exchange is an obvious choice for a review on national security grounds. Anne Salladin, an attorney who worked on CFIUS cases in the Treasury Department until 2013, told me that any case involving a Chinese acquisition is a likely candidate.

"Chinese companies routinely receive heightened scrutiny. It's also in an area of financial infrastructure that could be viewed as particularly sensitive," she said. "I'd be very surprised if CFIUS didn't have an interest in taking a look at this deal."

Often, parties to a deal that might warrant CFIUS review file papers with the government on their own, pre-emptively. The committee then typically conducts a 30-day review to determine whether an investigation is warranted. That investigation then takes an additional 45 days, after which the committee either approves the deal or recommends the president unwind it.

A Treasury Department spokesperson said the government does not comment on whether a deal is being reviewed in the CFIUS process.

Dozens of deals involving China have undergone CFIUS investigation, and most were approved. The U.S. government approved a Chinese firm's acquisition of Smithfield Foods, the nation's largest pork producer, in 2013 despite Congressional objections. That same year, CFIUS approved the Chinese state- owned oil giant CNOOC's $15 billion purchase of Canadian energy behemoth Nexen Inc., which had assets in the U.S. In 2005, IBM was allowed to sell its PC business to Lenovo.

But the committee has rejected several Chinese purchases of U.S. firms when national security risks are front and center. The U.S. government has blocked multiple deals involving Huawei, the Chinese telecom company that has links to the Chinese military, according to the U.S. intelligence community. President Barack Obama also forced the dissolution of the Chinese Sany Group's purchase of a wind farm company in 2012 because the wind farms were located near a Navy training facility in Oregon.

CFIUS has approved foreign acquisitions of U.S. stock exchanges in the past, including the 2007 purchase of the NASDAQ by a group including investors from the United Arab Emirates and the 2011 Deutsche Boerse acquisition of the New York Stock Exchange, although that deal later fell through for other reasons.

There's also the possibility that CFIUS and Chongqing Casin could negotiate a middle ground whereby the Chinese firm agrees to limited access and involvement.

The U.S. has a strategic interest in attracting foreign direct investment, and the political imperative in building economic ties with China is high. The CFIUS process is meant to be apolitical and based solely on national security considerations.

If the U.S. government does look into this case, it will likely find that Chongqing Casin's lack of transparency, combined with the systemic importance of the exchange, make this deal a tough sell.

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Josh Rogin, a Bloomberg View columnist, writes about national security and foreign affairs. He has previously worked for the Daily Beast, Newsweek, Foreign Policy magazine, the Washington Post, Congressional Quarterly and Asahi Shimbun.


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