Foreign Direct Investment (FDI) from China in U.S. Cannabis Businesses

24 Jun Foreign Direct Investment (FDI) from China in U.S. Cannabis Businesses

If you think your Chinese investor will be able to get your cannabis venture the promised investment funds any time soon, you are in for a long slog. Most companies do not care who provides their investment capital (as long as the investors are content being passive investors), and Chinese households have typically been lauded as excellent savers, much more so than we in the U.S., leaving money available to invest at home and abroad. Recently I spoke with a client in the California cannabis industry who had invested several million dollars into an integrated cannabis operation (cultivation, processing/manufacturing, and distribution). In conducting due diligence about his investment, I was interested to see that he was the only person involved in the business who was non-Chinese. He wanted to get his investment dollars out to put into a new venture, and he said, “The other owners tell me that they have friends in China who can put in enough money into the company that they can buy me out. But they are having trouble getting their money out of China right now. Do you think they will be able to get their money from China to the U.S. in the next few weeks?”

I chuckled in spite of myself and said, “That is not going to happen that soon, and it may not be possible to accomplish even in a few months.” China’s government has a tight grip on its money (technically renminbi (人民币) means “the people’s money”, but the people can’t be bothered to look after their own money, right?). Even when times are good, China controls foreign currency leaving the country, especially U.S. dollars. But times are not good in China, despite recent reassurances from Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission. How do we know times are not good in China? There are a lot of smart people in the world who track where money flows and how that movement (or lack thereof) impacts our qualities of life. They are called macro (big picture) economists. These economists have noticed that (a) although China is encouraging foreign investment in its banking and insurance sectors, promising ownership of up to 100% by foreign investors, so far no one is biting, and (b) foreign lending institutions are loathe to provide capital to Chinese banks and industries, seeing economic risks in China everywhere they look.

Chinese would-be investors in U.S. ventures, including hot market cannabis enterprises, are finding it exceedingly difficult to get money out of China, even their allotted USD $50,000 in foreign currency that each Chinese national is supposed to be permitted to purchase and transfer out of China, according to China’s State Administration of Foreign Exchange. But in practice, such applications are being more closely scrutinized by China’s ever-present bureaucratic machine, and even China’s elites like the former central bank adviser, Yu Yongding, are being denied access to foreign currency. That means your prospective Chinese investor or business partner (or customer who owes you money for your raw inputs, such as U.S. timber) will not be able to get you those U.S. dollars you have been waiting for any time soon, no matter how well connected they are.

Why is China holding onto U.S. dollars? We’ve discussed this (and all things related, on our firm’s China Law Blog) but China needs to maintain its foreign exchange reserves (largely held in dollars) for several reasons. One of the primary reasons is so that China can continue to fund its global export machine that does business in U.S. dollars with the rest of the world. Chinese exporters buy their raw inputs in U.S. dollars, so China’s central bank needs to keep foreign exchange reserves on hand to facilitate those transactions. A second reason is that to the extent China can keep U.S. dollars out of circulation, China can artificially keep its currency value low, which makes its exports more affordable to the U.S. and the rest of the world. China holds more than $3 trillion in of its assets in a foreign currency, which equals approximately $2,142 per capita in China’s 1.4 billion population (in comparison, the U.S.’ $126 billion in foreign exchange reserves equals approximately $385 per capita in the U.S.’ 327 million population). China’s currency restrictions are not new. These restrictions are an integral part of China’s economic policies under which China wants to keep its yuan valuation at least seven times higher than the U.S. dollar. China can also use its foreign currency holdings to buy up yuan when others are trying to dump it, to keep the yuan from freefalling in foreign exchange markets due to concerns like a trade war or ongoing economic restrictions or sanctions.

To bring this discussion full circle, if your would-be cannabis business investors are Chinese or have money in Chinese bank accounts that they are having “a little trouble” getting to your U.S. bank account, do not make any near-term plans that rely on their promised dollars, especially if the promised amount is more than $50,000. Chinese currency leaving for foreign markets is a form of capital flight to which China is keenly attuned and to which it will take great measures, both overt (currency manipulation) and covert (denying individual foreign exchange transactions in Chinese banks, even when those transactions are in sync with Chinese law).

Also, if your international investor has already applied or wants to apply for a fast-track EB-5 visa path to U.S. citizenship, their investing your marijuana venture (regardless of current state legality) is a huge red flag that will derail their application process and impact their ability (if they are or become a green card holder) to become a naturalized citizen because they will have been involved with a controlled substance under U.S. federal law. If the potential investor’s immigration attorney is not aware of that minor detail, then you can do your investor a favor and let them know. For a primer on foreign investment in U.S. cannabis businesses, read this. It is reasons like this, the intersection of our firm’s international practice and our cannabis practice, that make my daily law practice so interesting, intellectually rigorous, and fun.