Pending US investment restrictions on China threaten diplomatic outreach

Pending US investment restrictions on China threaten diplomatic outreach | ltc-a

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 American investment in Chinese companies involved in quantum computing, artificial intelligence and in semiconductors.

The looming 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 investments in a few small but highly strategic sectors. The department has also sought to ease concerns within China that the measures amount to a technology blockade intended to hurt the Chinese economy.

However, any such action should 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 be concerned about our investment policies toward China, » said Mark Sobel, a former longtime Treasury Department official who is now the US chairman of the Official Forum of Monetary and Financial Institutions. « The Chinese have their own problems with us, and both sides have a 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, tighter restrictions on technology from Washington, Beijing’s partnership with Moscow during the war in Ukraine and China’s continued threats to 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 on climate change, will travel there on Sunday.

But new investment restrictions from the United States could intensify the tit-for-tat measures the two countries have implemented just as they are trying to establish a « floor » under their relationship.

The new measures appear to have largely been established for many months now. But the Biden administration seems to have been slow to announce them given the tumultuous relationship with China. Some details also continue to be debated by US government agencies. Once restrictions are proposed, the private sector will have time to comment on the limits, which could affect how they are enforced.

Even if the Biden administration decides to further delay the issuance of the measures, it will face mounting pressure from lawmakers, who are considering their own broader restrictions on investments made in China.

Lawmakers and other supporters of the measures have complained that the current system allows American capital to flow into China and finance technologies that could ultimately pose a threat to US national security. The United States already prohibits US companies from directly selling certain advanced technologies to China and monitors investments Chinese companies make in America for potential security risks. But the US government has little knowledge 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 and dangerous level, » Roger W. Robinson Jr., former chairman of the Economic and Security Review Commission, testified in May US-China Congress, during a House Hearing.

Members of the Biden administration have spent much of the past year considering how broadly to enforce investment restrictions, with officials reaching out to corporate executives to get their views on the impact such a move could have. Industry groups and venture capitalists lobbied aggressively against a broad ban on investment in China, saying it would disrupt important business relationships and ultimately hurt the US economy.

The administration appears to have landed on a tailor-made measure, which would require companies to report more information to the government about their planned investments in China, while banning investments in some sensitive areas with military or surveillance applications.

In a May hearing before the Senate Banking Committee, Paul Rosen, assistant secretary of the Treasury for investment safety, said the administration was « working to create a narrow and targeted program » to limit investment in certain technologies sensitive with national security implications.

Supporters and critics alike 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 technological development, since the country has no shortage of funding for investment.

Nicholas R. Lardy, a non-resident senior fellow at the Peterson Institute for International Economics, said the United States was 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 China by U.S. venture capital and private equity firms has plunged to about $400 million, down from a peak of about $35 billion in 2021, Lardy said.

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 « aren’t even a rounding error. »

However, the new rules could prove significant by setting a precedent for restricting private sector investment in China. They could be a tool US officials turn to in times of tension with China and a policy approach that could seep into advanced democracies in the years to come.

At Group of 7 meetings in May, US officials discussed aligning such policies with close allies. A report released this year by the Center for Strategic & International Studies found that South Korea and Taiwan both had their own sets of investment restrictions. Taiwan’s rules impose specific rules on outbound investment in China based on the type of technology and include bans for high-tech sectors.

China set its own caps on outward investment in 2016. Beijing has steered the country’s businesses and households away from speculating on American real estate and even soccer clubs, prompting them instead to buy overseas assets in aircraft manufacturing, manufacturing heavy, artificial intelligence, cyber security and other strategic industries.

The Treasury Department would most likely be the government agency responsible for implementing the new restrictions. Ms. Yellen has been cautious that, if ill-conceived, they could undermine the traditionally open investment climate in the United States.

“I explained that President Biden is looking at potential exit investment controls in some very narrow high-tech areas and that if we go forward with these, they will really be very narrowly targeted,” Ms. Yellen said on “Face the Nation » on Sunday. He 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 Department official said Chinese officials had listened to the US justification for the possible restrictions, but it was unclear whether they agreed with the rationale.

Chinese officials are also cautiously watching as the Biden administration issues a series of export restrictions on the type of advanced chips that can be sent to China. The administration is considering new measures that could increase restrictions on the ability of Chinese companies to access cutting-edge AI capabilities via cloud services. Restrictions enacted last October prevented Chinese companies from purchasing such products directly.

Despite such broad areas of disagreement, Mr. Sobel, the former Treasury Department official, suggested that the US and China still had no choice but to continue talking to each other.

« 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, » she said.

Keith Bradsher contributed report.