Yahoo Finance Biden unveils plans to screen US investments in China
President Biden has signed an executive order designed to prohibit Americans from investing in some Chinese companies.
Details of the long-awaited effort are likely to further inflame relations between Washington and Beijing after a year in which the leaders of the nations — the two largest economies in the world — have been locked in an often bitter back and forth.
The plans announced Wednesday aim to block American capital in the months ahead from being invested in certain semiconductor, quantum computing, and artificial intelligence companies operating in China or under the control of the Chinese government.
The proposed rules will not go into effect immediately, and the next step is a review period that could last for at least a few months.
But if the proposal goes into effect as currently written, the rules will require that a range of financial transactions be cleared with the US government before proceeding. Some transactions will be scrutinized closely by the Treasury Department while others will be prohibited. White House officials say the measures are needed, as China is actively using certain companies to develop new technologies for military use.
"This is a national security action, not an economic one," said a senior administration official who outlined the plans. The actions will be designed to be as narrowly targeted as possible, this official added, with an aim to cut off military applications and not the overall Chinese economy.
But the economic effects could be felt widely with venture capitalist Edith Yeung, a general partner at Race Capital, telling Yahoo Finance that the order "is a major blow" to the overall Chinese startup ecosystem as well as American efforts to be involved with those companies, whether or not their products have military applications.
‘Now we can have conversations about the details’
The rules are set to most directly target investments in the world’s most advanced semiconductors as well as AI systems that have military applications. But for the moment, many details remain unanswered about where Biden will draw the line when it comes to which types of transactions are allowed and which will be banned.
White House officials said the rules could evolve over the course of the coming public review process, which is seeking input from both private companies as well as G7 allies.
"The goal here is to make sure that we provide industry with clarity so that they recognize what is permissible, which is a great deal of investments, and what isn’t permissible, which is going to be a narrow scope of investments," said a senior administration official, adding, "now we can have conversations about the details."
The restrictions aim to choke off both the money itself as well as what officials call the intangible benefits of those investments, such as enhanced standing and access to certain talent networks.
The new rules announced Wednesday are designed to operate in conjunction with export control rules for China that were issued by the Department of Commerce last year.
Those efforts are focused on denying the export of technology to China, aiming to put new restrictions on the ability to develop certain high-end computer chips that Biden officials say are being developed for military applications.
Wednesday’s announcement also comes one year to the day after the signing of the CHIPS and Science Act, a bill that was designed to boost the lagging American semiconductor sector. The law has also increased the tensions with China, most notably over the issue of proposed rules that could force chip companies to forgo any further material expansion in China in return for access to the $50 billion included in the law.
Aaron Chatterji, a Duke University professor and former White House CHIPS Coordinator, said in a Yahoo Finance Live interview earlier Wednesday that "companies that fulfill those national security objectives are going to be the ones that do really well in the program."
Administration officials are also working overtime to lessen tensions between the countries, but Wednesday's announcement could make that challenge much more difficult. Treasury Secretary Janet Yellen recently visited China and met with Chinese officials to parry concerns about today’s highly anticipated announcement, which Biden officials have been signaling for months.
Her message was to assure the Chinese government that the US is not looking to be punitive with its actions. In comments at the end of that trip, Yellen underlined that the new restrictions would be targeted "at a few sectors where we have specific national security concerns."
But China's ambassador to Washington quickly responded to Yellen’s comments by reportedly saying the idea of screening outbound investments would be unfair to China and added: "We will not flinch from provocations."
The proposed rules announced this week would put Secretary Yellen in charge of approving or denying these proposed financial transactions.
Secretary of State Antony Blinken also recently traveled to China, and Commerce Secretary Gina Raimondo is expected to visit in the coming weeks.
The executive effort also comes alongside recent efforts on Capitol Hill led by senators Bob Casey (D-Penn.) and John Cornyn (R-Texas). Senate Majority Leader Chuck Schumer immediately responded to Wednesday's new order, saying Congress would act further "to codify it into law and further refine this critical national security tool."
Biden officials Wednesday said they hope the proposal will not put a stop to economic cooperation between the two countries. "We are pursuing a policy of de-risking," said a senior official, "not decoupling our economies."
This post has been updated.
Ben Werschkul is a Washington correspondent for Yahoo Finance.
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