President Biden signed an executive order Wednesday aimed at curbing the flow of U.S. investment and management know-how into a limited range of Chinese firms that the administration fears could fuel Beijing’s military ambitions.

The order is a narrow, initial step that will not take effect until next year, but it is a signal to China’s leadership that Washington – despite a recent warming in diplomatic relations – intends to continue to impose restrictions on Beijing’s access to critical technology.

Chinese officials reacted sharply to the news of the pending executive order. “The U.S. habitually politicizes technology and trade issues and uses them as a tool and weapon in the name of national security,” Chinese Embassy spokesman Liu Pengyu said in a statement to The Washington Post. “We will closely follow the developments and firmly safeguard our rights and interests.”

China hawks in Congress, meanwhile, say the proposal – which excludes sectors such as biotechnology and energy – does not go far enough.

“The administration scaling back– at a time where aggressive action is needed more than ever – continues the trend of appeasing industry at the cost of national security,” said Rep. Michael McCaul, R-Tex., chairman of the House Foreign Affairs Committee.

“We need to stop the flow of American dollars and know-how supporting the [Chinese Communist Party’s] military and surveillance technology rather than solely pursuing half measures that are taking too long to develop and go into effect,” he added.

The White House order comes amid a tenuous thaw in a relationship marked by on-again, off-again engagement, which was frustrated by the appearance of a Chinese surveillance balloon over the United States earlier this year. Commerce Secretary Gina Raimondo is expected to travel to Beijing this month, following recent trips by Secretary of State Antony Blinken and Treasury Secretary Janet L. Yellen.

The order, the product of a two-year internal debate, gives Yellen the authority to regulate U.S. investment in three categories of Chinese companies: quantum computing, artificial intelligence related to military uses, and advanced semiconductors.

“Rapid advancement in semiconductors and microelectronics, quantum information technologies, and artificial intelligence capabilities by [China] significantly enhance [its] ability to conduct activities that threaten the national security of the United States,” the order states.

It contemplates a block on U.S. investment into subsets of these sectors, such as artificial intelligence systems designed primarily for military and intelligence use, software for chip design automation, and quantum technologies that “could compromise encryption and other cybersecurity controls and jeopardize military communications,” according to the Treasury Department notice of the proposed rule.

It also proposes a requirement that U.S. venture capitalists and other investors notify the Treasury of prospective investment into companies developing technologies in some of these targeted sectors.

The Biden order kicks off a process to solicit comment that is expected to take several months and could result in a narrowing of the ban’s already limited scope.

The White House order comes as China seeks to develop a world-class fighting force by 2049, even as the country faces a slowing economy.

The lengthy delay in issuing the order – there were expectations last year that the White House would move quicker – reflects the complex nature of figuring out where to draw lines around dual-use technologies such as artificial intelligence. The administration has also faced pressure from U.S. business interests that don’t want to be cut off from potentially lucrative investments in China.

For months, there has been intense internal debate over the scope of the Chinese restrictions, with the Treasury Department consistently advocating a narrow approach and the Pentagon pushing for a broader mandate. By late last year, the debate was settled in favor of a more limited scope, excluding, for instance, electric vehicles and biotechnology.

“This is hard to get right,” Mike Pyle, deputy national security adviser, said in a recent appearance at the Carnegie Endowment for International Peace. “These are very technical questions.”

During her visit to Beijing last month, Yellen sought to reassure Chinese counterparts that the investment curbs would be narrowly tailored to tackle specific national security concerns and are not aimed at slowing China’s economic advance.

Chinese officials are openly skeptical of the administration’s plan to carry out what Yellen describes as a “de-risking” of the U.S. relationship with China, with Beijing regarding it as a diplomatic euphemism for a broader economic decoupling that Beijing fears would aggravate its economic malaise.

Bans on U.S. investment in Chinese technology are not unprecedented. At the tail end of his administration, President Donald Trump issued an order banning U.S. investment into a few dozen Chinese companies with alleged ties to the People’s Liberation Army. In 2021, the Biden administration expanded the order, banning U.S. financing of additional firms, especially those that sell surveillance technology.

Analysts note that, for the moment at least, any such ban is likely to have minimal impact on China as U.S. investment has plunged, partly because of the lingering effect of stringent pandemic lockdowns and partly because of increased scrutiny of Western firms, which has spooked business.

According to the Rhodium Group, U.S. venture capital in China last year reached a 10-year low at $1.3 billion, down from a peak of $14.4 billion in 2018.

Nonetheless, China is not hurting for capital. It has plenty of its own still to dole out, analysts say.

“While Western funds may be disappointed about lost opportunities in advanced technology investments in China, there’s so much domestic money chasing these deals China will not be hurt,” said Andrew Collier, managing director of Orient Capital Research in Hong Kong and the author of “China’s Technology War.”

“At the end of the day China needs technology,” Collier said, “not venture capital money.”

The Biden order is also aimed at gaining a deeper understanding of investment flows into emerging technologies in China. It is intended to plug gaps left by export controls, which restrict exports of sensitive technologies but not investments into companies that use those technologies.

The Post reported in late 2021 that Goldman Sachs had invested in a fast-rising Chinese artificial intelligence company, 4Paradigm, which had won an unpublicized contract with the Chinese military. In March, the Commerce Department placed 4Paradigm on its blacklist barring exports of U.S. technology to the firm. But U.S. investors are still allowed to make deals with the company. That is one of the areas an “outbound screening” program is intended to address, officials say.

Another key objective is preventing the transfer of management advice to Chinese start-ups, officials say.

“There’s a mountain of evidence that China works through joint ventures to access technology and expertise – not just the hard technology, but the soft skills needed” to build successful enterprises, said Liza Tobin, an economic expert at the nonprofit Special Competitive Studies Project. “China has its cash. One thing the U.S. uniquely offers is expertise from Silicon Valley and Wall Street.”

U.S. officials in recent months have fanned out to allied capitals, seeking to build support for implementing similar measures. Germany and Britain are considering their outbound investment regimes. In June, European Commission President Ursula von der Leyen said the body would develop new investment rules by year’s end. “We need to ensure that European companies’ capital, their knowledge, their expertise, their research is not abused by countries of concern for military application,” she said.

For critics and advocates of a China investment screening program, the real question is where the policy goes next. Biden administration officials like to use the analogy of the “small yard, high fence,” to describe an approach that places strong controls on a narrow range of companies or technologies.

But if the policy isn’t carefully thought through, said Reva Goujon, a U.S.-China policy specialist at Rhodium Group, “your yard turns into a fence pretty quickly.”

Some national security experts argued the proposal, though slimmed down, is a welcome first step and hope it will be strengthened by lawmakers.

“Congress should mandate broader transparency requirements to deter risky transactions so the U.S. government can better understand the relevant capital markets,” said Ivan Kanapathy, who served as deputy senior director for Asia in the Trump and Biden administrations.

A measure adopted by the Senate would mandate notification to the Treasury Department on a broader range of prospective investments than those put forward by the administration.

A bill sponsored by Sens. Robert P. Casey Jr., D-Pa., and John Corny, R-Tex., passed in the Senate version of the National Defense Authorization Act, would also require notification for transactions related to other advanced technologies including hypersonics and satellite-based communications. The House must agree to that before it becomes law.

 

The Washington Post’s Joseph Menn contributed to this report.

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