This is actually a big deal.
Trump signed an executive order late Friday evening that is meant to limit (or force divestiture) - from both China's investment in US as well as US investment in China.
There is a lot here that will be market-moving…
An X thread by @CynicalPublius highlights the CFIUS review changes:
-Investors from friendly nations get an expedited CFIUS review.
-For Chinese investors (who are usually indistinguishable from the PRC government), what constitutes a “strategic” business is greatly expanded—now we’re not just talking about stuff like missile tech and AI, we’re talking more mundane stuff like farmland and mines.
-It also sounds like China will face a much stricter CFIUS review standard than investors from friendly countries. I think what Trump is saying is that basically ALL Chinese investment in or acquisition of US businesses will halt, and it remains to be seen how we may direct divestment of existing Chinese holdings in US companies.
-I don’t think people realize just how much Chinese investment there is in US companies. Many US white shoe law firms have massive China practices which facilitate enormous (both in terms of $$$ and frequency) investments by China in US technology industries, often through veiled entities like Cayman Island corporations. In my practice of law, I have long been stunned at just how much Chinese investment there is in our key technology businesses. If I am reading the tea leaves correctly, this EO is a signal that basically ALL Chinese investment in US companies will cease, and what Chinese holdings currently exist may require divestment.
Here is a great quote from the EO: " Economic security is national security. The PRC does not allow United States companies to take over their critical infrastructure, and the United States should not allow the PRC to take over United States critical infrastructure. PRC-affiliated investors are targeting the crown jewels of United States technology, food supplies, farmland, minerals, natural resources, ports, and shipping terminals.”
This EO does one other HUGE thing outside the scope of CFIUS. It limits US investment in Chinese companies, including the possibility of de-listing Chinese public companies from US stock exchanges. US investment in Chinese companies will be highly disincentivized and targeted tax hits could totally cut off US investment in China. Further, the EO signals that we will look through shell entities to discover Chinese ownership, and prevent US investment in those shell entities.
Finally, this EO states an aspirational goal of removing China from the WTO and cutting off its MFN status—two enormous policy changes.
I highlighted the above de-listing risk as it may be stretching it a bit…
Remember the de-listing threat in 2021-2022 that made “Chinese ADRs uninvestible” for many funds? Well, this prompted PCAOB to push dual listing of US-Chinese ADRs in Hong Kong (for which IBKR offers direct access). But his point/my point is that this threat of restrictions has started to shake the confidence of US investors holding Chinese plays, as seen by the strong selling in BABA, KWEB, FXI Monday.
My warning near the open to clients was clear: PROTECT CHINA LONGS !
It also made for some good chases short.
That Tax Treaty
Among the restrictions could be removal of a key tax treatment. Specifically, the administration is considering terminating the 1984 US-China tax treaty.
Michael McNail explains:
Currently, Chinese government entities (who hold almost $2 trillion in US assets) pay ZERO tax on portfolio income from US investments, while bond interest is exempt from withholding for all Chinese investors.
Terminating the tax treaty would restore the statutory 30% withholding rate on Chinese investments - a dramatic shift that would fundamentally alter the economics of Chinese capital flows to the US.
The memo's language is explicit: "That tax treaty...led to the deindustrialization of the United States and the technological modernization of the PRC military. We will seek to reverse both those trends."
In McNail's report - "The Sovereign Wealth Effect" & “The Dollar’s Dilemma” - they predict that this move, alongside the new US Sovereign Wealth Fund, confirms the administration is implementing a sophisticated strategy targeting capital flows rather than just using tariffs.
"until 1984, the U.S. maintained a 30% withholding tax on foreign interest income" and that reimposing this tax could be a key strategy for addressing trade imbalances.
First, it reduces the attractiveness of US financial assets for Chinese investors, helping redirect capital flows toward trade rebalancing.
Second, it potentially generates significant revenue: $360 billion annually from foreign holders of US securities (If done on a global basis).
Along those lines... @TrendTrader_US presented an interesting idea around those new-found US tax receipts:
"IF the US indeed terminates its income tax treaty with China, then all favorable tax provisions under that treaty goes away... [like] the 30% US withholding tax applicable to certain types of income (like dividend, interest, etc). So say a Chinese person is due such type of payment, then, without treaty benefits, the US payor must deduct and remit 30% to IRS. The Chinese person would only receive the difference. You can see how it can impact all kinds of payments from US to China & visa versa."
Money Going Home
Even if the above order doesn’t address the capital markets directly, 17% of the US stock market is held by foreigners ... for which a segment is from China and will seriously consider liquidating and going home.
This alone could be part of the reason in the recent market selling of Big Cap tech & semis.
But bigger picture, this rhetoric by Trump isn’t going away without a trade deal, so the continued volleys will be heard until they are felt:
And this is before we know what retaliatory measures will be taken by China against the US, as they already position and posture toward greater world tech dominance.
Huawei Achieves Key Breakthrough in AI Chip Production, Strengthens Challenge to Nvidia
DeepSeek is tip of iceberg.
and
DEEPSEEK INTRODUCES DEEPEP, ITS FIRST OPEN-SOURCE EP COMMUNICATION LIBRARY FOR MOE MODEL TRAINING, ON DAY 2 OF THE OPEN SOURCE WEEK.
Lots of China tech advancements AND high-end chip development is coming for US Tech dominance - not to mention scientific and energy advancements that can further put US exorbitant privilege to the test.
Good time to reread:
Wow...thank you Ms. LaDuc for this post. This is absolutely a big deal. You seem to be rather clairvoyant on this macro stuff. Back in the Elder Days, I worked near Capitol Hill in Washington D.C. I remember being on "The Hill" when the 'Most Favored Nation' trading status was being considered for China. At the time, I recall thinking, "Well, this is going to be a big mistake"
But the corporate lobbies carried the day. It will be very interesting to see how this plays out.
Thanks for this "head's up".
Fabulous find !!! I missed this CFIUS EO completely in the midst of the tariff tape bombs. Thiis note really needs to be read more widely - Thank you Sam !