President Joe Biden has issued an executive order that introduces limitations on new investments from the U.S. into China, with a specific focus on sensitive technological fields like computer chips. The order also requires government notification for involvement in other technology sectors.
This anticipated order grants the U.S. Treasury Secretary the authority to prevent or restrict American investments in Chinese entities within three specific areas: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems.
While the order does target specific parts of these three sectors, the precise details of these restrictions have not been provided. The proposal is currently open for public input.
The primary goal of this executive order is to prevent American resources and expertise from contributing to China's advancement in technologies that could enhance its military capabilities, potentially jeopardizing U.S. national security. The order encompasses various types of investments, including private equity, venture capital, joint ventures, and new investment initiatives.
In a communication to Congress, President Biden, a member of the Democratic Party, emphasized the need to address the potential progress made by countries like China in "sensitive technologies and products critical to the military, intelligence, surveillance, or cyber-enabled capabilities." He declared a national emergency to underscore this concern.
China has expressed serious reservations about the order, asserting its intention to retain the right to respond with countermeasures. The Chinese Commerce Ministry contends that the order disrupts normal business operations and decision-making processes, thereby undermining the global economic and trade order. The Ministry calls on the U.S. to uphold principles of fair competition and market economy laws, avoiding obstacles to global economic cooperation and the world economy's recovery.
China's Foreign Ministry has expressed strong dissatisfaction and opposition to the U.S.'s decision to impose investment restrictions. The Ministry urged the U.S. to honor President Biden's commitment to not decouple from China's economy or obstruct its economic development.
The central focus of this order revolves around investments in Chinese companies engaged in software development for designing computer chips and tools for chip manufacturing. These sectors have traditionally been dominated by the U.S., Japan, and the Netherlands, while China seeks to establish its own domestic alternatives.
Senate Democratic Leader Chuck Schumer highlighted that the order aims to ensure that American investments do not inadvertently contribute to China's military growth. The Treasury clarified that these regulations will only impact future investments, not existing ones, although disclosure of prior transactions might be required.
The introduction of this order could potentially escalate tensions between the world's two largest economies. The Chinese embassy in Washington expressed disappointment with the decision.
U.S. officials underscored that these restrictions target the most critical national security risks without intending to sever the deeply interconnected economies of both countries.
Critics, particularly Republicans, have argued that the order has gaps, such as its focus solely on future investments, and contend that it lacks assertiveness.
The executive order will prohibit specific investment deals and mandate investors to inform the government about their plans for other transactions. Certain transactions, such as those involving publicly traded instruments and transfers between U.S. parent and subsidiary companies, are expected to be exempted, according to the Treasury.
Due to escalating geopolitical tensions, the once-attractive Chinese tech industry for U.S. venture capital has seen a significant decline. Data from PitchBook revealed a substantial drop in U.S.-based venture capital investment in China, decreasing from $32.9 billion in 2021 to $9.7 billion in the previous year. In the current year, U.S. venture capital investors have only allocated around $1.2 billion to Chinese tech startups.
The order is set to be implemented next year, following multiple rounds of public commentary, which will include an initial 45-day comment period.