US starts process to restrict some investment in key tech in China

The White House on Wednesday moved to start prohibiting some U.S. investments in certain sensitive technologies in China, and requiring government notification of other investments, but said it would take time before the moves take effect.

President Joe Biden on Wednesday signed an executive order directing the U.S. Treasury Department to regulate certain U.S. investments in semiconductors and microelectronics, quantum computing and artificial intelligence, reports Reuters.

Following are some key details:

'COUNTRIES OF CONCERN'

The order lays out plans to regulate investments in certain "countries of concern," with a separate annex naming China, Hong Kong and Macau as initial targets. Further countries could be added later, a senior administration official told Reuters.

The outbound investment program would require notification of many investments while prohibiting only a few. Officials said the goal is to avert the "most acute" national security risks by regulating investments in Chinese companies and entities in areas that could give China military and intelligence advantages.

The rules will not be retroactive, applying only to future investments, an administration official said.

The United States already bans or restricts the export to China of many technologies and products under consideration for the new program, but restricting investment would prevent U.S. funds from helping China cement its own domestic capabilities, which could undermine existing export controls and inbound investment screening programs.

RULEMAKING PROCESS

Along with Biden's order, Treasury issued an advance notice of proposed rulemaking, which will allow companies and investors time to comment before it moves forward with a formal notice of proposed regulation. That would allow for further public comment, before Treasury can finalize the new regulations.

Experts said the whole process could take many months, pushing enactment of the new regulations well into 2024 - a presidential election year.

Treasury would have the authority to investigate potential violations and pursue available penalties, officials said, adding that it could also unwind future investments.

INTANGIBLE BENEFITS

Treasury said the program was expected to focus on U.S. persons engaged in transactions that could convey "intangible benefits" to Chinese entities, including equity interests, greenfield investments and joint ventures.

It is considering creating an exception for investments in publicly traded securities, index funds, mutual funds and other instruments that were less likely to result in intangible benefits.

PROHIBITIONS AND NOTIFICATIONS

Treasury said it was considering banning U.S. investments in Chinese development of electronic design automation software or semiconductor manufacturing equipment; the design, fabrication, or packaging of advanced integrated circuits; and the installation or sale of supercomputers.

It was considering requiring notification for investments in firms working on the design, fabrication, and packaging of less advanced integrated circuits.

U.S. investments in Chinese production of quantum computers, development of certain quantum sensors, and quantum networking and communication systems could also be banned.

In the AI sector, Treasury said it is considering notification requirements for U.S. investments in Chinese entities working on software that incorporates an AI system and could have military or intelligence applications.

It is also asking stakeholders how to shape a prohibition on U.S. investments in Chinese activities related to software that incorporates an AI system and is designed for uses that could have national security implications, to ensure any measures are "appropriately tailored" in the final rules.

CONSULTATION WITH ALLIES

Officials said the moves had been carefully discussed with allies and partners, and that U.S. officials, including Treasury Secretary Janet Yellen, had repeatedly and clearly told Beijing that Washington would narrowly limit the restrictions.

No coordinated action by allies was expected on Wednesday, although Britain and the European Union have already signaled their intention to move along similar lines, and the Group of Seven advanced economies agreed in June that restrictions on outbound investments should be part of the overall toolkit.