Bottom line: The US decision to force a sale of gay dating app Grindr by its Chinese owner reflects a new environment where Washington is almost certain to veto China purchases of local firms with access to sensitive user information.

A new report on the unhinging of a Chinese purchase of US gay dating app Grindr is shedding some interesting light on how Washington sees such deals, and offers insight into how far Chinese tech firms might be allowed into the country going forward. The picture isn't exactly too encouraging, though perhaps some might over-interpret things in light of all the recent trade tensions.

The case also sheds some light on the near-hysteria that seems to be growing daily in the US over telecoms giant Huawei, which is rapidly shaping up as the Chinese boogeyman of the 21st century. The central theme in all of this is that Washington believes China is out to steal private information on Americans any way it can, including through the use of private Chinese companies.

The latest story from Reuters delves into a development from about a month ago that saw Grindr's Chinese owner say it was planning to sell the company after coming under pressure from CFIUS, the US body that reviews all such deals for national security risks. (English article) The development was noteworthy because it marked one of the first times CFIUS had vetoed a deal in the Internet space, and also because it was one of the first deals it vetoed retroactively.

The Chinese owner, a company called Beijing Kunlun Tech, had actually purchased Grindr in two tranches starting in 2016 for a total of about $250 million. Things were quite different at that time, and CFIUS did not routinely review such deals and Kunlun didn't feel it necessary to ask for approval. Obviously things have changed quite a bit since then with the arrival of Donald Trump and his trade war with China, not to mention his numerous other beefs with the country.

Kunlun said last month it would sell Grindr at CFIUS' request, but didn't provide any detail. That's where this latest report from Reuters comes in, which does provide quite a bit of color on where the agency's concerns lay. It seems that after completing the purchase, Kunlun tasked its Beijing-based team with improving the app and later gave locally-based engineers access to Grindr's database with sensitive information on its 4.5 million daily active users. (English article)

Not surprisingly, CFIUS wasn't too keen about that, as that data included sensitive things like people's private messages and HIV status. There was never any evidence that the information was misused, but apparently the potential was enough to unnerve CFIUS into requesting the divestiture. 

Beijing's Long Hand

A consultant who used to work with CFIUS under the George W. Bush administration summarized the current situation nicely in the Reuters article: “CFIUS operates under the assumption that, whether through legal or political means, Chinese intelligence agencies could readily access information held by private Chinese companies if they wanted to." That summary comes from Rod Hunter, now an attorney at Baker & McKenzie.

This particular point not only lies at the heart of the Grindr case, but also at the separate case that has seen the US ban the use of Huawei networking equipment in major national telecoms networks. The thinking goes that perhaps the equipment is ok now. But in a country like China where the government has a hand in pretty much everything, there's no guarantee Beijing might not try to interfere in the future by, for example, forcing Huawei to provide its source code to look for backdoors in its networking equipment.

If that's the case, it certainly doesn't bode too well for Chinese high-tech acquisitions in the US. Washington previously vetoed a purchase of money transfer specialist MoneyGram International by Ant Financial, the financial arm of e-commerce giant Alibaba (NYSE: BABA). That deal clearly had similar implications, since MoneyGram would have had reams of information on the millions of people who use its popular money transferring services.

We've seen a few semi-similar actions in China by Beijing, most notably the requirement that tech companies like Apple (Nasdaq: AAPL) keep all their user information on Chinese users inside the country. I have yet to see China veto any actual deals. But I wouldn't be surprised at all if it did kill such future plans over similar concerns, especially in the months ahead until the current trade war gets resolved and things settle down.