SYDNEY - 7 May 2013: Western Governments continue to be challenged by the rapid growth of foreign direct investment by Chinese enterprises outside China, which has grown to more than $600 billion as at the end of 2012. The extraordinarily heavy handed treatment of Sany by the United States Government in connection with the acquisition of an Oregon wind farm demonstrates that there is still a long way to go in developing a more mature dialogue between western countries and China in relation to Chinese FDI.

In September 2012 President Barack Obama signed an Executive Order prohibiting Ralls Corporation, a company controlled by two executives of Sany Heavy Industry Co Ltd, from owning several wind farm projects in Oregon.  Sany is a Chinese multinational heavy machinery manufacturing company that is now the sixth largest heavy equipment manufacturer in the world.  Notably Sany is not a Chinese state-owned enterprise and is publicly listed on the Shanghai Stock Exchange.

In March 2012 two senior executives of Sany had acquired through Ralls Corporation several wind farm projects in Oregon, located within restricted airspace adjacent to a Naval bombing zone.  Sany commenced construction of wind farms using Sany turbines with a view to demonstrating their quality and reliability to the United States wind farm industry. 

In June 2012 Ralls Corporation made a voluntary filing with the Committee on Foreign Investment in the United States.[i] When a CFIUS review is initiated CFIUS has 30 days to review the transaction to determine its effects on the national security of the United States.[ii] If the review results in a determination that the transaction threatens to impair national security and that threat has not yet been mitigated CFIUS must conduct an investigation of the effects of the transaction within 45 days and take any necessary actions in connection with the transaction to protect national security.[iii] After conducting that investigation CFIUS must submit a report to Congress on the results of the investigation or submit the matter to the President for decision.[iv] The President has authority to take such action for such time as he considers appropriate if he finds there is credible evidence that leads him to believe that a foreign interest exercising control might take action that threatens to impair national security.[v]

In exercise of these powers Barack Obama made orders prohibiting Sany from owning the wind farms,  required the dismantling of the turbines and prohibited the sale of Sany turbines for use at the sites.  In October 2012 Sany commenced proceedings before the District Court of Columbia challenging the President’s decision on the basis it exceeded his powers under the CFIUS legislation, particularly in requiring the turbines to be dismantled and not sold for use at the sites, and that the action discriminated against Sany.  Wind farms in the restricted air space area use turbines made by German and Danish companies and are owned by an Indian conglomerate. 

On 26 February 2013 Judge Amy Jackson dismissed Sany’s complaint for lack of jurisdiction on the basis that the provisions of the CFIUS legislation provide that the actions of the President shall not be subject to judicial review.[vi] A further complaint that due process requires Sany to be provided with a more detailed explanation of the President’s findings was not struck out and that claim continued.  Ralls Corporation has appealed the decision.

The proposition that decisions of this nature should not be the subject of judicial review is not unusual.  In that regard Australia has a similar regime.[vii] However, what is extraordinary is the apparent heavy handed nature of the response and the likely impression created in China that Chinese enterprises are being discriminated against under foreign investment laws in western countries.

The general benefits of foreign direct investment globally is clearly articulated and understood as a central tenet of international co-operation. A recognised exception to that tenet is the need for sovereign nations to protect their national security. However the proposition that there is a general risk to the national security of the United States by the location of a wind farm in restricted air space adjacent to a bombing range when there are public roads closer to the range seems hard to fathom.

Other examples of heavy handed restrictions on Chinese investment under the rubric of national security concerns come to mind.  In 2009 the Australian Government suggested it would prohibit the acquisition of Oz Minerals by China Minmetals Non-Ferrous Metals Company if that acquisition included the Prominent Hill mine situated in the Woomera testing area in South Australia.[viii]  This was so even though a public highway was closer to the Woomera testing area than the mine itself.  Also in 2009 the proposed investment by North West Non-Ferrous International Investment Co Ltd in First Gold Corporation, a Toronto Stock Exchange mining company, was withdrawn when CFIUS advised it would recommend against the investment on the basis a proposed mine was adjacent to United States military installations in Nevada.[ix] The 2008 threatened blocking of the acquisition of 3 Leaf systems by Huawei Technologies leading to Huawei discontinuing the acquisition as well as the US House of Representatives Report on the intelligence risks posed by the commercial activities of Huawei and ZTE also come to mind.

These cases illustrate that western nations need to better engage with China to encourage sensible dialogue on China’s place in the new world order.  Surely valid concerns of national security can be dealt with in a more nuanced way than these cases seem to indicate.  While heavy handed decisions like these continue Chinese business can quite properly feel aggrieved that equal treatment is not being afforded to it.