Wall Street should bet on Trump killing Chinese deals

In his first U.S.-China summit, President Donald Trump took a significant step toward making good on campaign promises aimed at resetting a broken relationship between the world’s two largest economies.

For Trump voters on Main Street, the tone from Mar-a-Lago was exactly what they were looking for – get tough on North Korea, the South China Sea, cyber security and trade.

For Wall Street, things are less clear. Reportedly missing from the discussions was the growing Chinese appetite for acquiring American companies.

Four major Chinese takeovers of American companies are currently before the U.S Committee on Foreign Investment (CFIUS): Westinghouse Electric, Lattice Semiconductor Corp, MoneyGramInternational Inc. and Stillwater Mining Co. The Trump Administration could block one or more of these pending deals. Investors are wondering whether Trump’s anti-Chinese campaign rhetoric will translate into challenges to these or future transactions.

New data points to the new administration casting a sceptical eye on Chinese deals.

According to The Rhodium Group, a New York and California based research house, from 2015 to 2016 Chinese investments in American companies tripled, reaching a record $US45.6 billion. Last year, Chinese affiliated companies employed over 100,000 Americans. Eighty-three per cent of congressional districts contain companies with whole or partial Chinese ownership. North Carolina’s 4th Congressional District (which includes Research Triangle Park) has seen almost $US3.4 billion in Chinese purchases of local companies since 2000. Many in Washington see this development as ominous.

During his confirmation hearing, U.S. Secretary of Commerce Wilbur Ross stated that he was “very, very concerned” about the growth of China’s semiconductor sector. The head of Mr. Trump’s National Trade Council, Peter Navarro, wrote a book titled ‘Death by China’, which encourages the US to take a tougher stance on trade and investments with the country.

Meanwhile in Congress, at the end of last year, Rep. Robert Pittenger, a North Carolina Republican, rallied 21 members to sign a bipartisan letter urging the CFIUS to block the Lattice Semiconductor transaction. With Lattice Semiconductor currently trading at a 50 per cent implied probability (the odds of the transaction closing) on its takeover price, investors are seeing substantial risk in CFIUS approving the deal. Just this month, Rep. Pittenger also expressed opposition to the Chinese takeover of MoneyGram International. Prior to an overbid on the company from Euronet Worldwide, a payment services company headquartered in Texas, MoneyGram was trading at a 70% implied probability relative to the Chinese bid.

Senate sentiments are equally hostile. During the Mar-a-Lago summit, Sen. Bob Casey wrote a letter to Treasury Secretary Steve Mnuchin urging him to reject any a China-based company’s attempt to buy Westinghouse. On the Senate floor, Sen. John Cornyn (R-TX) and Sen. Charles Schumer (D-NY) are independently working on bipartisan legislation aimed at increasing the power of CFIUS. Sen. Schumer stated that his legislation was in response to the fact that “China has been eating our lunch, and stealing our jobs for far too long”.

While the economics at home, not to mention pressure from both within the administration and Capitol Hill, has yet to materialise into actual policy, Wall Street should bet on Team Trump curbing at least some Chinese deals.

Smart investors will be cautiously pessimistic about the US government approving many Chinese takeovers of American firms.

Mr. Kapadia is a political data scientist and managing director at VogelHood Group, a quantitative policy advisory firm in Washington, DC.

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