U.S. to Ban Some Investments in China
Biden plans to sign executive order that will also require U.S. private-equity and venture-capital firms to disclose certain investments in China
Aug. 9, 2023 The Wall Street Journal
The U.S. is set to ban private-equity and venture-capital investments in some Chinese technology companies under an executive order the Biden administration will release Wednesday, escalating Washington’s efforts to prevent Beijing from developing cutting-edge technology for its military.
The executive order is expected to cover direct investments in three technology sectors: semiconductors, quantum computing and artificial intelligence. It would prohibit investments in some forms of those technologies, while requiring Americans doing business in China to inform the U.S. government about investments in the three high-tech sectors more broadly.
Investors that violate those rules may face fines and be forced to divest themselves of their stakes, according to people familiar with the order. Before enforcing the new rules, the Biden administration is expected to accept feedback on them. They are expected to apply to future transactions and won’t cover portfolio investments in Chinese stocks and bonds, according to the people.
The rules are expected to technically also apply to investments into other adversaries such as Russia, but they are expected to only practically affect U.S. investment into China.
A Treasury spokesman declined to comment.
The executive order is a product of a growing bipartisan concern that American technology and know-how could inadvertently help Beijing develop weapons it could use against the U.S. in a military conflict. The Biden administration last year restricted exports of advanced semiconductors and chip-manufacturing equipment to China, and the U.S. has also heightened scrutiny of Chinese investment in American technology companies.
While Biden administration officials have cast the moves as targeted efforts to protect U.S. national security, officials in Beijing say they are aimed at kneecapping China’s economic growth and development. Chinese leader Xi Jinping complained to President Biden about the export controls on semiconductors last year. And in a step widely interpreted as retaliation for the U.S. export restrictions, China banned its major firms from buying technology from Micron Technology, the largest memory-chip maker in the U.S., earlier this year.
The new investment restrictions risk refreezing an attempted thaw in diplomacy between the two superpowers.
U.S. investment into China, which helped drive the country’s economic development, has slowed in recent years as the geopolitical rivalry has intensified. Direct U.S. investment into China hit a 20-year low of $8.2 billion last year, according to the Rhodium Group, which also said U.S. venture-capital investment hit a 10-year low of $1.3 billion last year.
It is unclear how much of that goes toward the targeted sectors. A report by Georgetown University researchers found that U.S. investors were involved in 401 transactions in Chinese artificial-intelligence companies between 2015 and 2021, with investments from exclusively American investors amounting to $7.45 billion in that time period.
As they crafted the executive order, Biden administration officials struggled with how to distinguish forms of artificial intelligence that primarily pose a national-security risk from others that are broadly used for everyday commercial purposes, according to people familiar with the talks.
Even ahead of their release, the new capital controls have started to reshape U.S. investor behavior. Venture-capital fund Sequoia Capital split off its China business earlier this year after persistent scrutiny in Washington. Other firms have slowed or paused transactions in China as they await the new rules, according to people familiar with their thinking.
Industry groups in Washington sought to narrow the rules, which the Biden administration spent more than a year crafting.
Other proposals to limit U.S. investment in China have been broader. A bipartisan group of lawmakers last year called for the creation of an interagency panel that would have screened investments in a wider range of technologies. Two lawmakers this year revived elements of that plan in an amendment adopted by the Senate to its annual defense-policy bill. Their legislation would require disclosure of investments, rather than prohibitions, and may not become law.
Rep. Mike Gallagher (R., Wis.) and the House committee dedicated to China have called for restrictions that also apply to the much larger flows of U.S. portfolio investment into China. In a recent letter, the committee criticized BlackRock and MSCI, a top stock-market-index compiler, for facilitating investment in Chinese companies that the U.S. government has accused of bolstering China’s military and violating human rights.
Within the Biden administration, officials from the Treasury and Commerce departments had successfully sought to limit the scope of the executive order, according to people familiar with the deliberations. Treasury officials, historically tasked with advocating for more U.S. investment into China rather than restricting it, worried about creating a set of rules that could be difficult to enforce. They also wanted to preserve many flows of U.S. investment and pushed to target the rules at technology particularly sensitive for national-security purposes.
The U.S. has also been pushing its allies in Europe and Asia to take similar steps to restrict investment into China, hoping to prevent firms from simply rerouting money through London or Tokyo, for example. After American lobbying, the Group of Seven advanced democracies in the spring agreed that capital controls “could be important to complement existing tools of targeted controls on exports and inbound investments.” The European Commission has proposed that the 27-member bloc adopt restrictions on investment abroad.
Write to Andrew Duehren at andrew.duehren@wsj.com
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Appeared in the August 9, 2023, print edition as 'U.S. to Ban Some Investments in Chinese Tech Firms'.