In the News: US Restricts AI Exports; JPMorgan's Futures JV; and Oil and Gas Opening Up

In December 2019, Reuters reported that the Commerce Department is finalizing five other rules covering products relating to quantum computing, semiconductors and 3D printing technology after seeking industry comment over the course of the year. These yet to be published rules will be proposed to international bodies before taking effect to ensure implementation by other countries so that U.S. companies are not disadvantaged, the report added. It also means that these additional rules will take longer to be finalized, likely after mid-2021 at the earliest. In October 2019, the Trump administration barred several Chinese AI companies from securing U.S. components due to their alleged roles in the ongoing Xinjiang controversy. One of those companies, Megvii, has recently received the go-ahead for a $500 million initial public offering in Hong Kong, according to media reports. The 2018 law underpinning these efforts also tightens scrutiny over foreign investment in emerging and foundational technology in the U.S. and establishes permanent statutory authority for the U.S. Export Administration Regulations, the nation's export controls.

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JPMorgan Chase seeks majority control over Chinese futures JV

JPMorgan Chase has lodged an application to secure majority control over its futures joint-venture (JV) in China, according to the Financial Times. The U.S. investment bank currently holds a 49% stake in Guangdong-based JPMorgan Futures, established in 1996. The JV will be China's first foreign-controlled futures company if the China Securities Regulatory Commission (CSRC) approves the application.

In October, the CSRC announced that the foreign ownership cap will be removed for futures companies from Jan. 1, 2020. In December, Bloomberg reported that JPMorgan Chase has plans to eventually secure a 100% stake in its futures JV. Although China's futures sector has been open to foreign investment for more than a decade, there has not been significant foreign participation with only a handful of foreign-invested futures companies in China, according to Norton Rose Fulbright's Sun Hong and Wenqi Zheng, due to restrictions on the business activities of derivatives companies in the country.

The CSRC has also said that foreign ownership limits in fund management and securities companies will be removed on Apr. 1 and Dec. 1 respectively. The moves are milestones in China's efforts to open up its financial industry to foreign participants. The futures sector was first opened up to foreign investors in 2005 under the Closer Economic Partnership Arrangement (CEPA) with Hong Kong, in which foreign ownership was limited to 49%. In 2014, the scope of qualified foreign investors was expanded to include foreign investors from many other countries and regions including the U.S., Canada and Australia. It was then announced in 2018 that foreign ownership limits would be fully lifted in 2021. However, in July 2019, this timetable was moved forward by a year as part of China's accelerated opening up of its financial industry. In December, JPMorgan received approval to launch a majority-owned Chinese securities business. HSBC, Nomura and UBS already have control over their respective securities JVs in China, while Morgan Stanley and Credit Suisse are waiting for approvals to take control of theirs. 

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China opens up oil and gas industry to foreign companies

China will open up oil and gas exploration to foreign companies for the first time this year, the nation's ministry of natural resources said at a briefing on Jan. 9. Only state-owned companies were previously allowed to do so. Oil and gas was removed from the most recent list of industries in which foreign investment is restricted by the government ("Negative List") published in July, which came into effect on Jan. 1.

Under the new rules, foreign firms registered in China with net assets of 300 million yuan ($43 million) will be eligible to participate in oil and gas exploration and production from May. 1. The asset requirement will also apply to domestic firms as well. According to Reuters, China imports 70% of the crude oil it refines and almost half of its natural gas. A government official said that the move will "stimulate market vitality".

Foreign companies traditionally could only tap China's oil and gas industry through partnerships with legally designated Chinese national oil companies such as China National Petroleum Corporation, China Petrochemical Corporation, and China National Offshore Oil Corporation. This restriction was removed for China's free trade zones (FTZs) in 2018. The latest announcement by the resources ministry provides foreign investors a concrete plan following the removal of oil and gas from the list of restricted industries nationwide in July. China's massive reliance on imports for oil and gas, especially from the Middle East, seems increasingly problematic given the ominous geopolitical situation in the region.

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