The Biden administration on Friday outlined plans to restrict new U.S. investment in key Chinese technology industries that could be used to bolster China’s military power, further straining economic ties with Beijing amid rising trade tensions.
The Treasury Department’s proposed rules would ban certain U.S. investments in Chinese companies developing semiconductors, quantum computers and artificial intelligence systems. The Biden administration is seeking to limit U.S. funding for helping China develop advanced technologies that could be used for weapons tracking, government espionage and surveillance.
The restrictions are expected to be finalized later this year, nearly a year after President Biden signed an executive order seeking an investment ban that will have a significant impact on venture capital and private equity firms that do business with Chinese companies.
“The proposed rule would promote national security by preventing the many benefits of certain U.S. investments – not just capital – from supporting the development of sensitive technologies in countries that could threaten our national security,” said Paul Rosen, undersecretary for investment security at the Treasury Department.
The regulations require investors to notify the Treasury Department of certain types of transactions and explicitly prohibit some types of investments. As part of the program, the Treasury Department has the power to enforce divestments, and violations may be subject to criminal prosecution by the Department of Justice.
The rules apply to equity investments, debt financing convertible into equity, and joint ventures.
The Biden administration stressed that the new investment restrictions are intended to be narrowly targeted and that the United States is not seeking to block all investment in China.
Diplomatic relations between the United States and China have improved over the past year with more frequent dialogue, but economic tensions remain high.
Last month, Biden announced a large increase in tariffs President Trump imposed tariffs on a range of Chinese imports, including electric vehicles, solar cells, semiconductors and advanced batteries, saying he was working to protect strategic U.S. industries from new competitors that are unfairly subsidized by Beijing.
Chinese officials have expressed concern to U.S. officials, including Treasury Secretary Janet L. Yellen, about the new investment restrictions, which come at a time when foreign investment in China is declining.
U.S. investment in China has fallen from an average of $14 billion per year from 2005 to 2018 to an average of $10 billion per year since 2019, according to data from the Rhodium Group last year. U.S. venture capital investment in China fell to a 10-year low of $1.3 billion in 2022.
The Biden administration is asking U.S. allies to create their own programs to screen investments in China.
Lawmakers are also working on legislation that would build oversight of sensitive Chinese investments in the technology sector into U.S. law.
“Allowing American companies to invest in China in sectors like AI and semiconductors puts our national security and economic future at risk,” said Sen. Bob Casey, D-Pennsylvania. “The Administration’s proposed rules are a good start, but I will continue to work to pass bipartisan legislation to make the Foreign Investment Review Program permanent.”
