Efforts to ease tensions between the US and China through a series of diplomatic visits to Beijing could be undermined as the White House moves forward with plans to impose new restrictions on US investments in Chinese companies involved in quantum computing, artificial intelligence and semiconductors.
The threatened restrictions were a central topic of discussion between Treasury Secretary Janet L. Yellen and senior Chinese officials during her four-day trip to China, which ended on Sunday.
The Treasury Department has sought to narrow the scope of the restrictions, which target private equity and venture capital investment in a few limited – but highly strategic – sectors. The department also tried to allay concerns inside China that the measures amount to a technological blockade meant to harm the Chinese economy.
However, such actions are expected to anger China and will be the first test of the new channels of communication that the world’s two largest economies are trying to restore.
“They will have concerns about our investment policies toward China,” said Mark Sobel, a former longtime Treasury official who is now the US president of the Official Monetary and Financial Institutions Forum. “The Chinese have their issues with us, and both sides have a pretty clear understanding that there is tension.”
US-China relations have recently been pushed to their weakest point in years. Tensions have flared over the flight of a Chinese surveillance balloon over the United States, tougher restrictions on technology from Washington, Beijing’s partnership with Moscow during the war in Ukraine and China’s continued threat from Taiwan.
In recent months, the Biden administration has worked to halt a further decline in the relationship, which it sees as a potential threat to global peace and stability. In addition to Ms. Yellen, Secretary of State Antony J. Blinken visited Beijing last month and John Kerry, President Biden’s special envoy for climate change, is traveling there on Sunday.
But new investment restrictions from the United States could increase the measures the two countries are deploying just as they try to put a “floor” under their relationship.
The new measures appear to have been largely settled for many months now. But the Biden administration appears to be delaying announcing them because of the tumultuous relationship with China. Some of the details are also still being debated by US government agencies. Once the restrictions are proposed, the private sector will have time to comment on the restrictions, which could shape how they are placed.
Even if the Biden administration decides to go ahead with issuing the measures, it will face increasing pressure from lawmakers who are considering their own broader restrictions on investments made in China.
Lawmakers and other supporters of the measures complained that the current system allows US capital to flow to China and finance technologies that may ultimately pose a threat to US national security. The United States already prohibits American companies from directly selling certain advanced technologies to China, and monitors the investments that Chinese companies make in America for potential security risks. But the US government has little understanding and no control over money traveling from the US to China.
“China has harnessed, directed and manipulated Western greed to advance its strategic goals to an unprecedented, dangerous degree,” Roger W. Robinson Jr., former chairman of the congressional Committee on the US-China Economic and Security Review, testified in May. House hearing.
Members of the Biden administration have spent much of the past year weighing how broadly to apply investment restrictions, with officials reaching out to business executives to get their views on the impact such a move could have. Industry groups and venture capitalists have come out aggressively against a broad ban on investment in China, saying it would disrupt important trade relationships and ultimately harm the US economy.
The administration appears to have settled on a narrowly tailored measure that would require companies to report more information to the government about their planned investments in China, barring investments in some sensitive areas with military or surveillance applications.
In a May hearing before the Senate Banking Committee, Paul Rosen, the Treasury’s assistant secretary for investment security, said the administration was “working to create a narrow and focused program” to limit investment in certain sensitive technologies with national security implications.
Both supporters and critics acknowledge that the measure’s greatest significance is what it could mean for future regulation. They say the new rules themselves are unlikely to do much in the short term to affect China’s technology, as the country has no shortage of investment funding.
Nicholas R. Lardy, a non-resident senior fellow at the Peterson Institute for International Economics, said the United States is the source of less than 5 percent of China’s inward direct investment in both 2021 and 2022. In the first quarter of this year, investment in Mr. Lardy said China from U.S. venture capital and private equity firms collapsed to about $400 million, down from a peak of about $35 billion in 2021.
But total domestic investment in China in the quarter was $1.5 trillion, he said, adding that U.S. venture capital and private equity flows “are not even a rounding error.”
However, the new rules could prove significant by setting a precedent for the restriction of private sector investment in China. They could be a tool that US officials turn to in times of tension with China, and a policy approach that could cascade through advanced democracies in the coming years.
In a Group of 7 meeting in May, US officials discussed the possibility of reconciling such policies with close allies. A report published this year by the Center for Strategic and International Studies noted that South Korea and Taiwan both had their own sets of investment restrictions. Taiwan’s rules set specific regulations on outflow investments in China based on the type of technology and include prohibitions for high-tech sectors.
China set its own limits on foreign investment in 2016. Beijing steered the country’s companies and households away from speculating in American real estate and even soccer clubs and pushed them instead to buy foreign businesses in aircraft manufacturing, heavy manufacturing, artificial intelligence, cyber security. and other strategic sectors.
The Treasury Department would most likely be the government agency responsible for enforcing the new restrictions. Mrs. Yellen was careful that if they were poorly conceived, they could undermine the traditionally open investment climate in the United States.
“I made it clear that President Biden is examining potential controls on outflow investment in certain very narrow high-tech areas, and that if we move forward with these, that they will be very narrowly targeted indeed,” Ms. Yellen said on the “Face the” from CBS. Nation” on Sunday. She added that the controls “should not be something that will have a significant impact on the investment climate between our two countries.”
A senior Treasury official said Chinese officials had heard the justification provided by the United States for the potential restrictions but that it was not clear whether they agreed with the rationale.
Chinese officials are also paying close attention to the Biden administration issuing various export restrictions on the type of advanced chips that can be shipped to China. The administration is considering new measures that could increase restrictions on the ability of Chinese companies to gain access to cutting-edge artificial intelligence capabilities. through cloud services. Restrictions issued last October prevented Chinese companies from directly buying such products.
Despite such wide-ranging disagreements, Mr. Sobel, the former Treasury official, suggested that the United States and China still had little choice but to continue talking.
“We’re in the boat together, and that means they just have to talk and get along — whether they’re happy with each other or not,” he said.
Keith Bradsher contributed reporting.