US to restrict select private-sector investments in sensitive Chinese technologies over national security concerns

In an unprecedented move, the US Treasury will be given powers to monitor and restrict select US private-sector investments in Chinese sensitive technologies, specifically those that could advance China’s military, intelligence, surveillance, or cyber-related agendas.

On 9 August, US President Joe Biden signed an executive order that will restrict select US investments in China that relate to “sensitive technologies and products critical to the military, intelligence, surveillance, or cyber-enabled capabilities”. In a letter to Congress, Biden even went as far to say that the advancement of certain technologies by countries such as China constituted a “national emergency” for the US, citing national security concerns.

Under the long-anticipated order, American companies will need to disclose all investments made in China’s high-tech sector, specifically in three key domains: semiconductors, quantum-computing technologies, and AI. It means that the US Treasury Department can prohibit or restrict US investments in any of these technology areas, should it choose.

Limiting China’s military, intelligence, and surveillance agenda

The move is aimed at stopping US investment and expertise from helping Chinese companies to develop and advance technologies that support its military, intelligence, and surveillance agenda. The order targets private equity, venture capital, joint ventures, and emerging technology investments. The White House says that allies had been consulted, and the issue was discussed at the G7 meetings in May. South Korea and Taiwan already have their own sets of investment restrictions on investments in China based on technology type.

The US measures are expected to come into effect in 2024 following a 45-day comment period that will also be open to the public. They will affect future investments only – however, there may be requests from the US Treasury for disclosure of historic transactions.

According to data from investment database PitchBook, US investment in Chinese technology startups has already fallen significantly, with total US-based venture capital and private equity investment in China dropping from $32.9 billion in 2021 to just $9.7 billion in 2022. Likewise, in the first quarter of 2023 US investment in Chinese tech companies stood at a lowly $400 million.

In 2016, Beijing placed restrictions on outbound investments in sectors such as US real estate and sports teams, pushing them instead towards buying overseas businesses in aircraft construction, heavy manufacturing, AI, cybersecurity, and other strategic sectors. In response to the US measures, Beijing stated that it was “gravely concerned” about the order and that it reserves the right to take actions in response.

A step too far, or not far enough?

However, the US measures have been met with mixed reactions in the US, with some commentators suggesting that this unprecedented restriction of US private-sector investment could have a negative impact on the US economy by raising costs for US companies and isolating the country from technological advances. Conversely, others believe that the measures do not go far enough, only targeting a small proportion of Chinese technology businesses and technologies, and that they are likely to have a minimal impact.

Pamir considers that the implementation of the US measures will have a major impact on the outcome of the investment restrictions. If they are allowed to extend to other sectors, and to other G7 nations, then the measures could stifle the sharing of information, innovation, and technological advance. However, if they only restrict a minimal range of technologies, then US private-sector investment could potentially aid China’s geopolitical agenda.

As always, Pamir provides advisory information to US businesses as events continue to unfold. Our services offer a comprehensive view of current and emergent risk across the complete supply chain and stakeholder ecosystem. Backed by our ongoing publication and insight schedule, our services ensure that all threats are identified across partners, people, and your portfolio, so that you can safeguard your current and future investments.

Contact us today, to find out how our service portfolio can help you assess risks and ensure that you meet both US and local compliance requirements.