The Biden administration is set to announce new restrictions on American investments in specific advanced industries in China. These restrictions aim to safeguard national security, although they are likely to provoke Beijing. This move represents one of the initial significant steps the United States has taken in its economic conflict with China to control financial transactions, and it could pave the way for further investment limitations between the two countries in the future.
Under these restrictions, private equity and venture capital firms would be prohibited from investing in certain high-tech sectors such as quantum computing, artificial intelligence, and advanced semiconductors. The intention behind this is to prevent the transfer of American capital and expertise to China. Additionally, firms engaging in investments across a broader range of Chinese industries would be required to report their activities, enabling the government to gain better insight into financial exchanges between the two nations.
While the White House declined to comment on these restrictions, Biden officials assert that investment limitations will specifically target sectors that could potentially aid the Chinese military or surveillance state, without impeding legitimate business with China. Emily Benson, the director of the project on trade and technology at the Center for Strategic and International Studies, emphasized the mounting evidence of U.S. capital being used to enhance Chinese military capabilities and the urgent need to address this.
The Biden administration has made efforts to ease tensions with China by dispatching top officials for dialogue, yet it continues to pursue measures aimed at reducing risks in critical supply chains and imposing restrictions on the sale of certain technologies to China, such as advanced computing semiconductors. It is worth noting that the Chinese government has long imposed restrictions on foreign investments, and other countries like Taiwan and South Korea have similar outgoing investment limitations.
Previously, the U.S. government had largely refrained from interfering with financial transactions between the world’s two largest economies. However, due to severed economic ties and a decline in investments between the U.S. and China in recent years, venture capital and private equity firms have actively sought lucrative collaborations to gain access to China’s thriving tech industry.
The planned investment restrictions have encountered criticism from congressional Republicans and others who believe they have been too delayed and insufficient in limiting U.S. funding of Chinese technology. Members of a House committee on China expressed concerns about venture capital firms investing in Chinese companies in areas like artificial intelligence and semiconductors. Critics argue that such restrictions would primarily disadvantage the U.S. economy, as other nations continue to establish technology partnerships with China, which possesses abundant capital.
Nicholas R. Lardy, a nonresident senior fellow at the Peterson Institute for International Economics, pointed out that the U.S. accounted for less than 5 percent of China’s inbound direct investment in recent years. He believes that unless major investors adopt similar restrictions, the U.S. policy is futile and plays into the hands of those in Beijing who view the U.S. as attempting to contain China rather than seeking dialogue.
To garner support for these measures, Biden officials have engaged with allies and encouraged other governments to adopt similar restrictions. Discussions have taken place at international meetings, including the Group of 7 in Japan, where Ursula von der Leyen, the president of the European Commission, called on the European Union to implement its own measures.
The administration plans to allow businesses and organizations an opportunity to provide feedback on the new rules before finalizing them in the coming months. Implementing and enforcing these restrictions may pose challenges, requiring close collaboration with Silicon Valley and Wall Street. Claire Chu, a senior China analyst at Janes, acknowledged the difficulty of communicating and enforcing such measures, considering the intersection of national security, international finance, and private market dynamics.
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