Why one of China's richest men is squaring off against Obama in court

One of China’s richest men squares off against President Obama in a Washington federal court today, challenging the US leader’s refusal, on national security grounds, to let him build a wind farm in the US.

“We are suing the president because we do not accept his finding that we are a national security threat. It is not true,” says Wu Jialiang, CEO of Ralls Corp., whose deal to buy land for a wind farm in Oregon near a US Navy weapons training facility ran into a presidential veto in September. 

US and Chinese lawyers say it is unlikely Ralls will win its case, but that the high profile challenge is a landmark in Chinese companies’ increasingly bold strategy of investing abroad. It could also serve as a test of Chinese allegations that US investment rules are biased against Chinese companies.

Ralls Corp. is affiliated to Sany Group, one of China’s biggest private companies, whose president, Liang Wengen, ranks sixth on Forbes 2012 China Rich List. Ralls co-owner Mr. Wu is Mr. Liang’s deputy and proxy.

Ralls bought four plots of land on which it planned to build a wind farm in March 2012. The deal was later blocked by the Committee on Foreign Investment in the United States (CFIUS), a government agency empowered to review foreign purchases of US assets to ensure they entail no national security risk.

CFIUS said it had found “credible evidence” that Chinese ownership of land near a military facility posed a risk. Ralls challenged that finding, prompting Mr. Obama to issue the first presidential order in 22 years backing a CFIUS ruling.

He issued the executive order at the climax of his presidential campaign, when he was under fire from Mitt Romney for being soft on China. Ralls then filed a suit against the president for exceeding his authority.

Lawyers do not expect the case to go far.

“The government has a pretty good case that once the president issues an executive order, that is the end of the story,” says David Fagan, an expert on cross-border investment with Covington & Burling, a Washington law firm. “The statute is pretty clear that the president has the authority to prohibit a transaction to safeguard national security.”

‘When you challenge the Titan’

But the lawsuit has symbolic and psychological value, says Hao Junbo, an independent expert on transnational legal cases. “It will be good publicity in China,” he says. “When you challenge the Titan, the US, you appear a hero.”

At the same time, Mr. Hao adds, “the case presents a confident Chinese company insisting it has not done anything wrong. This case’s meaning is psychological.”

Ralls co-owner Wu, however, says he is suing because “the CFIUS definitely had political reasons [to block the deal] because we are a Chinese company.” Other firms from other foreign countries are operating wind farms on land adjacent to the restricted military area without problems, he points out. 

This is not the first time that frustrated Chinese investors have complained about politicized hostility to them in the United States.

Last month a Congressional panel branded two top Chinese telecommunications companies, Huawei and ZTE, as potential threats to US national security, seriously undermining their prospects of doing business in the US.

In 2005, CNOOC’s $18.5 billion bid for Unocal foundered on Congressional opposition. In 2009, CFIUS forced a Chinese mining company to give up its bid for a goldmine in Nevada near a naval air station. Last year, Huawei backed off a plan to buy assets from US computer server firm 3Leaf in the face of CFIUS objections.

“This is not the first time that the US government turns down a Chinese investment for political reasons,” the Chinese Commerce Ministry spokesman Shen Danyang said in response to Obama’s ruling. “It is all about political interests when the politicians poke their noses into bilateral commercial and trade relations,” he added.

US officials insist that the Ralls decision signals no general hostility to Chinese investment. “The president’s decision is specific to this transaction and is not a precedent with regard to any other foreign direct investment from China or any other country,” the Treasury Department said in a statement.

Chinese investment in the US   

Indeed, the figures show that Chinese investment in the US, though still a tiny fraction of overall foreign investment there, is growing fast; a record $7.8 billion in deals had been announced this year by the end of August, according to data from Dealogic.

“The US is very, very open to investment from China … and the CFIUS process was not set up to be biased against China,” says Mr. Fagan.

But the 2007 Foreign Investment and National Security Act does establish a presumption that all purchases of US firms by foreign-state-owned enterprises will require a formal CFIUS investigation, points out Karl Sauvant, who teaches at Columbia Law School in New York.

“Since 90 percent of China’s outward investment comes from state owned enterprises, and China is unique in that … Chinese enterprises get more attention” from CFIUS than companies from other countries, says Dr. Sauvant, author of a book “Is the US Ready for FDI From China?”

“CFIUS was established in reaction to a jump in Japan’s foreign direct investment, and it was strengthened in response to a rise in China’s investment” in the US, says Sauvant.

‘Sounds like discrimination’

And, because of where they come from, acknowledges Fagan, “there is no question that Chinese transactions present more complexities than transactions from other countries.”

“One thing the process takes into account is the country of the investor, the capability and record of that country, including surveillance and spying, that might threaten US national security,” Fagan points out. “Investors from certain countries, including China, face greater scrutiny.”

Most Chinese investment deals in America go through without a hitch, says Sauvant, but the lesson of the Ralls case and others, he says, is that “whenever something is in a sensitive sector or involves larger, more visible projects, Chinese investors would be well advised to prepare the ground very carefully in Washington.”

To Chinese ears, that sort of caveat sounds like discrimination. “The US government and people do not think the Chinese government is 100 percent like other ones,” says Mr. Hao, the lawyer. “They always have doubts; it is cultural and political discrimination.”

Ralls CEO Wu complains that the presidential order “branded Sany, which is a good corporate citizen and a good company, as criminals. What kind of signal are they sending – that Chinese companies are not welcome to invest in America?”

“This will undermine other Chinese firms’ confidence about investing in America,” Wu adds.

Wu is also looking to officials in Beijing for support. “The relationship between the government and companies is like the relationship between parents and their children,” he argues. “We left home, went far away, and got bullied. But the US has many children in China; if they bully our children, can’t China bully theirs? Are Boeing planes safe to fly, for example?”

The Ralls case is unlikely to be the last of its kind, observers predict. But as Chinese companies ramp up their foreign acquisitions, it marks the first time that a Chinese firm has launched such a high level legal challenge to what it says is an unjust US ruling.

“This could well be an indication of things to come,” suggests Sauvant, “when Chinese investors will stand up if they feel they have been badly treated. One could argue that this is a straw in the wind.”