Biden sets new rules restricting U.S. investments in China

President Joe Biden on Wednesday will establish new rules limiting American investments in high-end Chinese technology sectors — a long-awaited effort meant to stop U.S. capital from financing Beijing’s military development.

The move represents the first time the U.S. government has sought to impose broad investment rules on U.S. firms overseas — an escalation of the economic conflict with China that is likely to earn a sharp rebuke from Beijing. Until now, U.S. firms have largely been given free rein by Washington to develop business in other countries, except for limitations on a narrow list of military-related goods. But national security officials in both the Trump and Biden administrations have warned that U.S. investors have been financing Beijing’s military advancements by funding Chinese firms that turn around and give their technology to China's military.

The executive order, which will be implemented by the Treasury Department, will prohibit some investments in Chinese firms engaged in developing quantum computing sensors and networks, as well as advanced semiconductor firms, and certain artificial intelligence firms. It will also require U.S. firms to notify the federal government if they invest in some lower-end semiconductor production not already covered by export controls, said a group of senior administration officials, who requested anonymity to brief reporters on Wednesday afternoon.

“The program will prohibit certain investments in entities that engage in specific activities related to these technology areas that pose the most acute national security risks, and will require notification for other sensitive investments,” said one of the senior administration officials, who added that the focus of the restrictions is on investments that confer "tangible benefits" to China's military.

The rules will only apply to new investments — not existing deals — and will likely go into effect next year, following a comment period for industry.

The action will not seek to limit so-called “passive investments,” like U.S.-based pension funds that broadly invest in Chinese securities. Administration officials are “contemplating an exemption for investments in publicly traded securities” as part of Treasury’s rulemaking process, arguing that those investments don’t typically lead to the type of technology transfer that benefits the Chinese military.

“The thing we're trying to prevent is not money going into China overall, because they have plenty of money,” said the administration official. “The thing they don't have is the know-how, and … the know-how we’ve seen [transferred] is often very connected to specific types of investments, and that isn't necessarily seen when it comes to passive investments in the Chinese stock market.”

The administration's action comes just prior to an expected trip by Commerce Secretary Gina Raimondo to China in the coming weeks and after months of efforts to soothe relations between the two countries that had been in turmoil ever since a Chinese spy balloon was discovered in U.S. airspace. Treasury Secretary Janet Yellen visited Beijing in early July where she signaled that the two sides had made progress in shoring up the frayed relationship. During that trip, Yellen briefed her Chinese counterparts on the administration’s plans for investment rules, the senior administration officials confirmed on Wednesday.

Despite that engagement, the executive order appears slightly more aggressive than recent expectations. In February, POLITICO reported that the administration had scaled back the executive order by cutting out some industrial sectors — like biotech and clean energy — and only applying investment prohibitions to the advanced semiconductor sectors.

Wednesday’s actions include more investment prohibitions than those earlier discussions, though biotech and clean energy are still omitted. During months of internal debate, the Treasury and Commerce Departments have argued for a more modest action, while the National Security Council and other Defense officials have pushed for a more aggressive approach.

The administration has also pushed global allies to follow suit with their own rules to restrict investment in Chinese tech sectors. Though no announcements are imminent, the officials said that they hope moving first will persuade other governments to issue similar rules.

Other governments want to “understand the details,” the official said, “and by putting out the [rulemaking], now we can have conversations about the details as to how we act going forward together in a way that will best protect our shared national security.”

The order puts the Biden administration in a more hawkish position than congressional lawmakers, who have also debated legislation on American investments in China for years.

Last month, Senate lawmakers voted overwhelmingly to add a similar measure — the Outbound Investment Transparency Act — to the yearly defense authorization bill. But that measure contains no investment prohibitions after it was watered down by congressional Republicans. House lawmakers are pursuing a different approach that focuses on expanding existing corporate blacklists at Treasury, Commerce and the Defense Departments, and will likely unveil that bill this fall. Already, some of the more hawkish elements of the House GOP caucus are hitting out at the administration for not going further with its order.

“While I’m pleased to see the Biden administration restrict new outbound investments in China, the failure to include existing technology investments as well as sectors like biotechnology and energy is concerning,” said House Foreign Affairs Chair Michael McCaul.