The Biden administration intends to impose new restrictions on American investments in certain advanced industries in China, according to sources familiar with the discussions. This move, aimed at safeguarding national security, is likely to provoke Beijing.
It would be one of the initial significant actions taken by the United States in its economic confrontation with China to control financial flows. This could lay the groundwork for further investment restrictions between the two countries in the future.
The restrictions would prohibit private equity and venture capital firms from investing in specific high-tech sectors such as quantum computing, artificial intelligence, and advanced semiconductors. The aim is to prevent the transfer of American funds and expertise to China.
Furthermore, it would mandate that firms making investments in a broader range of Chinese industries report these activities, enhancing government oversight of financial exchanges between the United States and China.
Biden officials have underscored that investment restrictions will narrowly target sectors that could support the Chinese military or surveillance state in combating security threats, without disrupting legitimate business with China.
Experts have provided evidence that U.S. capital is being utilized to enhance Chinese military capabilities, and the U.S. lacks effective means of countering such activities, stated Emily Benson, the director of the project on trade and technology at the Center for Strategic and International Studies.
While the Biden administration has sought to improve relations with China, it continues to work towards reducing risks in critical supply chains by diversifying suppliers beyond China. Additionally, it has progressively increased restrictions on the sale of specific technologies to China, including advanced computing semiconductors.
Foreign investments in China have long been restricted by other governments, such as Taiwan and South Korea. However, until now, the U.S. government has largely left financial flows between the two largest economies untouched. Previously, American policymakers were focused on opening Chinese financial markets for U.S. firms.
In recent years, investments between the United States and China have declined significantly as the countries severed other economic ties. Nonetheless, venture capital and private equity firms have continued seeking lucrative opportunities for partnerships in China’s thriving tech industry.
The proposed measure has faced criticism for being too delayed and not comprehensive enough in limiting U.S. funding of Chinese technology. Some argue that the restriction would primarily disadvantage the U.S. economy, as other countries continue to establish technology partnerships with China, which has ample capital.
Nicholas R. Lardy, a nonresident senior fellow at the Peterson Institute for International Economics, highlights that the United States represents less than 5 percent of China’s inbound direct investment in 2021 and 2022.
Mr. Lardy believes that unless other major investors in China adopt similar restrictions, the planned measure is futile and plays into Beijing’s perception that the U.S. seeks to contain China without genuine dialogue or thawing of relations.
Biden officials have engaged with allies in recent months to explain the measure and encourage other governments to implement similar restrictions. Ursula von der Leyen, the president of the European Commission, has already voiced support for the European Union introducing its own measure.
The administration is expected to allow businesses and organizations to provide feedback on the new rules before they are finalized in the coming months.
Implementing and enforcing the measure will be challenging, requiring close engagement with Silicon Valley and Wall Street, according to Claire Chu, a senior China analyst at Janes, a defense intelligence company.
She further emphasizes that this is not only an interagency effort but also an exercise in intersectoral coordination, as the U.S. national security community has been hesitant to view the international financial system as a potential battleground, while the business community opposes the politicization of private markets.