Biden gives nod to ban on US tech investments in China

New York/Washington — President Joe Biden on Wednesday signed an executive order that will prohibit some new US investment in China in sensitive technologies such as computer chips and require government notification in other tech sectors.

The long-awaited order authorises the US Treasury secretary to prohibit or restrict US investments in Chinese entities in three sectors: semiconductors and microelectronics, quantum information technologies and certain artificial intelligence systems.

The administration said the restrictions will apply to “narrow subsets” of the three areas but did not give specifics. The proposal is open for public input.

The order is aimed at preventing American capital and expertise from helping China develop technologies that could support its military modernisation and undermine US national security. The measure targets private equity, venture capital, joint ventures and greenfield investments.

Biden, a Democrat, said in a letter to Congress he is declaring a national emergency to deal with the threat of advancement by countries such as China “in sensitive technologies and products critical to the military, intelligence, surveillance or cyber-enabled capabilities”.

China said on Thursday it is “gravely concerned” about the order and that it reserves the right to take measures.

The order affects normal operation and decision-making of enterprises, and undermines the international economic and trade order, a statement from the Chinese commerce ministry reads.

The ministry also said it hopes the US will respect laws of the market economy and the principle of fair competition, and refrain from “artificially hindering global economic and trade exchanges and co-operation, or set up obstacles for the recovery of the world economy”.

Fulfil promise

The Chinese foreign ministry said the country is “strongly dissatisfied” with and “resolutely opposes the US insistence on introducing investment restrictions on China”, having also lodged solemn representations with the US.

China urged the US to fulfil Biden’s promise of no intention to decouple from China or obstruct China’s economic development, the ministry said.

In a separate statement Hong Kong’s government said the US restrictions are “unreasonable measures” against the special Chinese administrative region and said that they “hindered and disrupted normal investment and trade activities”.

“The measures undermine the international economic and trade order and damage the economic and commercial interests of American companies themselves”, the Hong Kong government said, adding that it creates more uncertainty for global economic growth.

The proposal focuses on investments in Chinese companies developing software to design computer chips and tools to manufacture them. The US, Japan and the Netherlands dominate those fields, and the Chinese government has been working to build home-grown alternatives.

The White House said Biden consulted allies on the plan and incorporated feedback from Group of Seven nations.

“For too long, American money has helped fuel the Chinese military’s rise,” said Senate Democratic leader Chuck Schumer. “Today the US is taking a strategic first step to ensure American investment does not go to fund Chinese military advancement.”

Fuel tensions

The regulations will only affect future investments, not existing ones, Treasury said, but it may ask for disclosure of prior transactions.

The move could fuel tensions between the world’s two largest economies. The Chinese embassy in Washington said it is “very disappointed” by the measure.

US officials insisted the prohibitions are intended to address “the most acute” national security risks and not to separate the two countries’ highly interdependent economies.

Republicans said the order is rife with loopholes, such as only applying to future investment, and is not aggressive enough.

The order will prohibit some deals and require investors to notify the government of their plans on others.

The Treasury said it anticipates exempting “certain transactions, including potentially those in publicly traded instruments and intracompany transfers from US parents to subsidiaries”.

The Chinese tech industry, once a magnet for US venture capital, has already seen a drastic decline in US investment amid intensifying geopolitical tension.

Last year, total US-based venture-capital investment in China plummeted to $9.7bn from $32.9bn in 2021, according to PitchBook data. This year so far, US VC investors only put $1.2bn into Chinese tech start-ups.

The measure is expected to be implemented next year, a person briefed on the order said, after multiple rounds of public comment, including an initial 45-day comment period.

Many loopholes

Republican Senator Marco Rubio said the Biden administration’s plan is “almost laughable”.

“It is riddled with loopholes, explicitly ignores the dual-use nature of important technologies, and fails to include industries China’s government deems critical,” he said.

A spokesperson for the Chinese embassy in Washington said the White House has not heeded “China’s repeated expression of deep concerns” about the plan.

The spokesperson said more than 70,000 US companies do business in China. The restrictions will hurt Chinese and American businesses, interfere with normal co-operation and reduce investor confidence in the US, he said.

The Semiconductor Industry Association said it hopes the order will enable “US chip firms to compete on a level-playing field and access key global markets, including China”.

Emily Benson of the Center for Strategic and International Studies (CSIS), a bipartisan policy research organisation, said key questions are how the plan affects US allies and how China responds.

Reuters