The move -- criticized by China -- prohibits U.S. persons from making "certain transactions" in semiconductors and microelectronics, quantum information technologies and AI sectors and requires them to notify the Treasury Department when making such transactions.
In the long-awaited executive order, Biden declares a national emergency in dealing with "countries of concern" rapidly developing "sensitive technologies," which "significantly enhances their ability to conduct activities that threaten the national security of the U.S."
China, Hong Kong and Macao are the only names identified as "countries of concern" in the executive order.
The executive order will be implemented by the Treasury Department in consultation with other agencies, including the Commerce Department. The Treasury Department is seeking public comment on implementation of the executive order.
The order "is a narrowly targeted action to protect national security while maintaining our long-standing commitment to open investment," a statement by the Treasury Department said.
The department said it expects to exempt "certain transactions, including potentially those in publicly traded instruments and intracompany transfers from U.S. parents to subsidiaries."
"As part of a comprehensive, long-term strategy to advance the development of sensitive technologies and products, the PRC is exploiting, or has the ability to exploit, U.S. investments to further its ability to produce a narrow set of sensitive technologies critical to military modernization" it said, referring to the acronym for the People's Republic of China, China's official name.
China's Ministry of Commerce issued a statement on Thursday morning criticizing the U.S. for "seriously deviating from the principles of market economy and fair competition that it has persistently promoted."
The latest move by Washington will "impact ordinary corporate management decision making, destroy international economic and trade orders, and seriously disturb the security of global industrial connections and supply chain," according to an anonymous spokesperson from the ministry.
The ministry expressed "serious concern," while claiming that it reserves the right to take necessary measures without further elaboration.
The idea of screening outbound investment to China has been floated before. The Foreign Investment Risk Review Modernization Act of 2018, enacted under former President Donald Trump, initially included provisions to give the Committee on Foreign Investment in the United States the power to review outbound investment activities.
But lobbying from the business community led to their removal from the bill.
One challenge in crafting the Wednesday's executive order was giving it teeth while not being so burdensome to lose support in Washington and the business community.
"Investors shouldn't overreact to the [executive order], which largely represents a win for industry," said Shehzad Qazi, managing director of China Beige Book, an analytics firm advising investors on China.
"The focus should now be on what kind of legislative response we'll get from Congress, where there is a focus on putting together a broader outbound investment restrictions bill," Qazi said.
The executive order came on the anniversary of Biden signing the bipartisan CHIPS and Science Act into law, which also contains restrictions on investing in production of advanced semiconductors in China.
The China investment restrictions are expected to add further tensions between Washington and Beijing. The U.S. has issued several export bans to limit certain Chinese companies' access to advanced AI chips and chipmaking equipment.
The Treasury Department said the new national security program would "prevent U.S. investments from helping accelerate the indigenization of these technologies in the PRC which undermines the effectiveness of our existing export controls and inbound investment screening programs which also seek to protect U.S. national security."
The order describes countries of concern exploiting U.S. investments as well as so-called "intangible benefits" that often accompany that investment, like better market access and networking.
H.K. Park, managing director for Crumpton Global, a Washington-based consultancy firm that has been preparing investors to comply with the new regulations, was struck by this language.
"Thus far, the debate has focused on outbound investment, not outbound expertise. A Treasury regulation that attempts to restrict the latter will be more comprehensive but also more difficult to implement," Park said.
Additional reporting by Kenji Kawase in Hong Kong