Biden plans new restrictions on US investments in China, declares 'emergency' on sensitive tech
US President Joe Biden announced on Wednesday plans for new restrictions on investments that US companies can make overseas, the latest in a series of measures aimed at blunting China's access to technologies that could undermine American national security
In a separate but related move, the White House declared "a national emergency to deal with the threat of advancement by countries of concern in sensitive technologies and products critical to the military, intelligence, surveillance, or cyber-enabled capabilities of such countries".
China, along with its special administrative regions of Hong Kong and Macau, is noted as the only country of concern in the "national emergency".
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The new restrictions in Biden's executive order are intended to restrict US venture capital and private equity investments in Chinese companies in three areas: "semiconductors and micro electronics, quantum information technologies and certain artificial intelligence systems", according to a senior Biden administration official who briefed reporters on Wednesday.
The order also calls for the creation of an outbound investment review mechanism "because our export controls don't offer investments abroad that can help foreign adversaries or countries of concern to fuel indigenous development of national security technologies", another administration official said.
"By adding outbound investment screening to our suite of national security tools, we're enhancing US capabilities to safeguard our national security," this official said.
The administration plans a 45-day period of consultation, seeking input from domestic stakeholders and allied countries, to refine and clarify the rules that will be put in place to fulfil the objectives of the order.
To limit disruptions to ordinary capital flows between the two countries, the rules will not target "passive investments", like holdings in publicly traded Chinese companies, a third senior official said.
Venture capital and private equity partners "connect people to experts", the official said. "They will connect to the various companies that are in their portfolio to each other and that's what we're getting at.
"China doesn't need our money; they are net capital exporters. The thing they don't have is the know-how, and the know-how we've seen is often very connected into specific types of investments.
"And that isn't necessarily seen when it comes to passive investments in the Chinese stock market."
Biden's announcement came on the first anniversary of his signing into law the Chips and Science Act.
That law, which provides about US$52 billion in incentives for companies committing to develop and produce semiconductors in the US, is meant to reduce America's reliance on China and other markets for the key components.
Administration officials including Commerce Secretary Gina Raimondo and Treasury Secretary Janet Yellen have said the administration seeks to keep the scope of the new investment restrictions as narrow as possible to limit the damage such a move would have on the bilateral relationship.
"You don't want the cutline to be so broad that you deny American companies revenue and China can get the products elsewhere, or China gets products from other countries, so what we're trying to do is be narrowly defined [and] work with our allies on these chokepoint technologies," Raimondo said last month.
The announcement on Wednesday follows a string of moves to restrict the provision of advanced US technology to China.
In addition to concerns about Beijing's military advances, such measures contend that such flows support the Chinese government's repression of dissent and efforts to control ethnic minorities.
China still draws billions of dollars in US investment each year, which many of Washington's critics of Beijing have spotlighted as potentially undermining American interests. But the upwards trajectory has moderated in recent years.
Risk consultancy Rhodium Group estimates that US direct investments in China have levelled off from an average of US$14 billion a year from 2005 to 2018 to an average of US$10 billion a year from 2018 to now.
Such investments fell to a 20-year low of US$8.2 billion in 2022, amid China's stringent Covid-19 shutdowns.
Rhodium's data on US venture capital in China shows investment at a 10-year low last year at US$1.3 billion, down from the peak of US$14.4 billion in 2018.
The restrictions announced on come amid aggressive rhetoric and legislative action in Congress from lawmakers in both parties seeking to curtail America's economic integration with China. These include bills and other actions aimed at cutting investments in Chinese companies.
The House Select Committee on Strategic Competition between the United States and the Chinese Communist Party, for example, has requested that BlackRock - the world's largest asset management firm, with a reported US$8.6 trillion under management - provide details about its holdings in Chinese companies, according to a letter the panel sent on July 31 to BlackRock's chief executive, Laurence Fink.
In May, a bipartisan bill was introduced in the Senate that would prevent the retirement plan for federal employees from including stakes in Chinese companies, the latest in a series of laws and executive orders aimed at restricting the ability of US entities to fund technologies that could harm American national security.
The Taxpayers and Savers Protection Act, which would block the federal retirement plan from investing in firms based in or closely affiliated with China, Iran, North Korea and Russia, was sponsored by four Republican senators known for pushing anti-China initiatives - including Florida's Marco Rubio - and Senator Jeanne Shaheen, Democrat of New Hampshire.
Companies prohibited in the act include not only those headquartered in one of the four targeted countries or listed on exchanges in them, but also those firms deriving more than half their revenues within the countries.
In recent years, US lawmakers have pushed for an outbound investment review board to ensure that American investors do not help advance China's military capability.
The concept was included in an early version of the Chips and Science Act, which passed last year without it.
This article originally appeared on the South China Morning Post (SCMP).
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