U.S. to Ban Private-Equity and Venture-Capital Investments in Chinese Tech Companies: Biden Administration Takes Aim

Washington, D.C. – In a pivotal move to counter China’s technological advancement for military purposes, the U.S. government is poised to unveil an executive order that will prohibit private-equity and venture-capital investments in specific Chinese technology firms. This impending executive order, set to be released on Wednesday, marks an escalation of U.S. efforts to secure national security interests.

Anticipated to focus on semiconductors, quantum computing, and artificial intelligence, the executive order will outlaw direct investments in these sectors. Moreover, U.S. entities engaging in business with China will be mandated to report investments in these high-tech areas. Those flouting these regulations could incur financial penalties and may need to divest from the stakes involved.

Insiders familiar with the order suggest that before implementing the rules, the Biden administration will solicit feedback. While the rules are projected to be applicable to future transactions, they will exclude portfolio investments encompassing Chinese stocks and bonds. Though technically encompassing investments in other adversarial nations, the primary effect will be on U.S. investments in China.

While the Treasury Department declined to comment on the matter, these actions underscore bipartisan concerns that American technology might inadvertently bolster China’s military capabilities. This mirrors the Biden administration’s previous actions, which included restrictions on exports of advanced semiconductors and chip-manufacturing equipment to China.

Though the U.S. has framed these measures as national security safeguards, China views them as attempts to hinder its economic growth. These tensions strain diplomatic ties, and these new investment restrictions could further exacerbate this delicate balance.

In recent years, escalating geopolitical rivalry has already led to a slowdown in direct U.S. investments into China. The forthcoming executive order is poised to exacerbate this trend. Last year, direct U.S. investments in China plunged to a two-decade low, with U.S. venture-capital investments in China hitting their lowest point in a decade.

Crafting the executive order encountered challenges in distinguishing forms of artificial intelligence that pose national-security risks from those with broader commercial applications. This highlighted the intricacies of regulating these technologies.

The impending restrictions are already reshaping investor behavior. Notably, Sequoia Capital split its China business amid heightened scrutiny in Washington. Meanwhile, other investment firms are adopting a cautious approach to transactions in China, awaiting the formalization of the new rules.

Industry groups in Washington have sought to influence the scope of these regulations, as the Biden administration spent over a year crafting them. Additionally, broader proposals to limit U.S. investment in China have surfaced, including the creation of an interagency panel to review investments in a wider array of technologies.

Within the Biden administration, officials from the Treasury and Commerce departments collaborated to narrow the scope of the executive order. Treasury officials, who historically advocated for increased U.S. investment in China, raised concerns about rule enforceability. Their focus was to target sectors with significant national-security implications.

In an international context, the U.S. is urging allies in Europe and Asia to adopt similar measures to restrict investments in China. The Group of Seven advanced democracies recently agreed that capital controls could complement existing export and inbound investment controls. Meanwhile, the European Commission has proposed investment restrictions for its member nations.

As details of the anticipated executive order are unveiled, its potential impact on U.S.-China relations, national security, and investment dynamics remains to be seen. The Biden administration’s approach to navigating these intricate issues within the global technology and geopolitical landscape is poised to shape future policies and international dynamics.