Efforts to ease tensions between the United States and China through a series of diplomatic visits to Beijing could be undermined as the White House presses ahead with plans to impose new restrictions on American investments in Chinese companies involved in quantum computing, artificial intelligence and 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 concluded 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 has also tried to ease concerns within China that the measures amount to a technology blockade intended to damage the Chinese economy.
Still, any 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’re going to have concerns about our investment policies toward China,” said Mark Sobel, a former longtime Treasury Department official who is now the U.S. chairman 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’s tension.”
U.S.-Chinese 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 threatening of Taiwan.
In recent months, the Biden administration has been working 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 heading there on Sunday.
But new investment restrictions from the United States could escalate the tit-for-tat measures that the two countries have been deploying just as they are trying to set a “floor” under their relationship.
The new measures seem to have been largely settled for many months now. But the Biden administration appears to have delayed announcing them given the tumultuous relationship with China. Some of the details also continue to be debated by U.S. government agencies. Once the restrictions are proposed, the private sector will have time to comment on the limits, which could shape how they are put in place.
Even if the Biden administration decides to hold off further on issuing 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 to China and finance technologies that may ultimately pose a threat to U.S. national security. The United States already prohibits U.S. 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 U.S. government has little insight into and no control over money traveling from the United States to China.
“China has harnessed, directed and manipulated Western greed to advance its strategic aims to an unprecedented, perilous degree,” Roger W. Robinson Jr., a former chairman of the congressional U.S.-China Economic and Security Review Commission, testified in May during a House hearing.
Members of the Biden administration spent much of last year weighing how broadly to apply investment restrictions, with officials reaching out to business executives to get their views on the impact that such a move might have. Industry groups and venture capitalists lobbied aggressively against a broad ban on investment in China, saying it would be disruptive to important business relationships and ultimately harm the U.S. economy.
The administration appears to have landed on a narrowly tailored measure, which would require companies to report more information to the government about their planned investments in China, while prohibiting investments in a few sensitive areas with military or surveillance applications.
In a May hearing before the Senate Banking Committee, Paul Rosen, the assistant secretary of the Treasury for investment security, said the administration was “working to craft a narrow and focused program” to restrict investment in certain sensitive technologies with national security implications.
Both supporters and critics acknowledge that the measure’s biggest 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 development, since the country has no shortage of investment funding.
Nicholas R. Lardy, a nonresident senior fellow at the Peterson Institute for International Economics, said the United States was the source of less than 5 percent of China’s inbound 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 collapsed to roughly $400 million, down from a peak of roughly $35 billion in 2021, Mr. 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 “are not even a rounding error.”
Still, 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 U.S. officials turn to in times of tension with China, and a policy approach that might cascade through the advanced democracies in the years to come.
In Group of 7 meetings in May, U.S. officials discussed the possibility of aligning such policies with close allies. A report published this year by the Center for Strategic & International Studies noted that South Korea and Taiwan both had their own sets of investment restrictions. Taiwan’s rules place specific regulations on outbound investments in China based on the type of technology and include prohibitions for high-tech sectors.
China put in place its own limits on outbound investments in 2016. Beijing steered the country’s companies and households away from speculating on American real estate and even soccer clubs and pushed them instead to buy overseas businesses in aircraft production, heavy manufacturing, artificial intelligence, cybersecurity and other strategic sectors.
The Treasury Department would most likely be the government agency responsible for carrying out the new restrictions. Ms. Yellen has been wary that if they are poorly devised, they could undermine the traditionally open investment climate in the United States.
“I explained that President Biden is examining potential controls on outbound investment in certain very narrow high-technology areas, and that if we go forward with these, that they will be indeed very narrowly targeted,” Ms. Yellen said on CBS’s “Face the 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 Department official said that Chinese officials had heard the justification provided by the United States for the possible restrictions but that it was not clear if they agreed with the rationale.
Chinese officials are also watching warily for the Biden administration to issue a variety of export restrictions on the type of advanced chips that can be sent to China. The administration is mulling new measures that could step up restrictions on the ability of Chinese companies to gain access to cutting-edge artificial intelligence capabilities via cloud services. Restrictions issued last October stopped Chinese companies from purchasing such products directly.
Despite such broad areas of disagreement, Mr. Sobel, the former Treasury Department official, suggested that the United States and China still had little choice but to keep 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,” he said.
Keith Bradsher contributed reporting.
Alan Rappeport is an economic policy reporter, based in Washington. He covers the Treasury Department and writes about taxes, trade and fiscal matters. He previously worked for The Financial Times and The Economist. More about Alan Rappeport
Ana Swanson is based in the Washington bureau and covers trade and international economics for The Times. She previously worked at The Washington Post, where she wrote about trade, the Federal Reserve and the economy. More about Ana Swanson
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