US will prohibit American investments in China's technology sector

The United States will prohibit American investment in certain sectors of China's high-tech industry, including artificial intelligence, further straining relations between the two superpowers.

US companies will also be required to disclose their high-tech investments in China.The much-anticipated action grants the US government new authority over private companies' international transactions.

The US stated that the measure's scope would be limited. However, it is likely to worsen economic relations between the world's two largest economies.

China expressed extreme disappointment. Liu Pengyu, a spokesperson for the Chinese embassy in Washington, stated that the US has "continuously escalated repression and restrictions on China."

He added that White House assertions that the United States was not attempting to harm China's economy or separate the two countries were inconsistent with its actions and that they urged the United States to honor its contractual obligations.

The order by US President Biden formally launches the effort to draft rules prohibiting American companies from investing in "countries of concern" firms that are active in quantum computing, advanced semiconductors, and certain areas of artificial intelligence.

The government will also require US companies to inform the Treasury Department of investments in companies developing a wider range of artificial intelligence and semiconductor technologies.

The regulations are anticipated not to apply to so-called portfolio investments, in which firms invest passively in companies via the stock market, but rather to active investments by private equity, venture capital, and other firms.

They are now entering a period for public comment, which is expected to further clarify the prohibited categories of investments.

The restrictions are not anticipated to take effect for several months. In a press briefing, senior administration officials stated that the measure was a "national security measure, not an economic one." They stated that the United States remained committed to open investment.

According to a 2022 report by the US-China Investment initiative, controls on outbound investment are uncommon among advanced economies, with the exception of Japan and Korea.

Prior restrictions on China commerce in the United States relied on limiting the sale of sensitive technology by American companies and screening Chinese investments in American businesses. In addition, the Trump administration has prohibited investments in firms with ties to the Chinese military.

The most recent measure enjoys broad support in Washington, where it is viewed as closing a regulatory gap regarding financial flows that threatens to enable American capital and know-how to flow into China and aid its military ambitions. With some success, the United States has been attempting to garner international support for the investment restrictions.

In May, Prime Minister Rishi Sunak stated that the government would consider limiting outbound investment; earlier this summer, the European Commission released a proposal focusing on investments in sensitive technologies.

It is unclear to what extent the order would influence investment flows.

China was the number two destination for foreign investment in 2022, trailing only the United States. However, many reports indicate that the amount of money streaming into the country from the United States and elsewhere has decreased significantly as geopolitical relations deteriorate.

A recent survey conducted by the Institute of Directors in the United Kingdom revealed that one in five importers had already shifted investments out of the country due to geopolitical tensions.

According to the Rhodium Group, the value of US foreign direct investment transactions in China fell to approximately $8 billion in 2017, the lowest level in nearly two decades.

China has retaliated against the restrictions with its own rules, including restrictions on exports of certain crucial minerals used to manufacture computer processors.