Diplomatic access threatened by looming US investment restrictions on China

Diplomatic access threatened by looming US investment restrictions on China

Beijing’s efforts to ease tensions through a series of diplomatic visits could be undermined as the White House plans to impose new restrictions on US investments in Chinese companies involved in quantum computing, artificial intelligence and semiconductors. Moving forward on plan.

The looming sanctions were a central topic of discussion between Treasury Secretary Janet L. Yellen and senior Chinese officials during a four-day visit to China that concluded Sunday.

The Treasury Department has sought to narrow the scope of the sanctions, which target private equity and venture capital investments in certain limited — but highly strategic — sectors. The department has also sought to downplay concerns within China that the measures are tantamount to a technology blockade intended to harm the Chinese economy.

Still, any such move is likely to anger China and would be the first test of the new channels of communication the world’s two largest economies are trying to restore.

“They are going to have concerns about our investment policies toward China,” said Mark Sobel, a former Treasury Department official who is now the US chairman of the official Monetary and Financial Institutions Forum. “The Chinese have their issues with us, and there is a clear understanding on both sides that there are tensions.”

US-China relations have recently reached their weakest point in years. Tensions have risen over Chinese surveillance balloons flying over the United States, Washington’s tough restrictions on technology, Beijing’s partnership with Moscow during the war in Ukraine and China’s continued threats to Taiwan.

In recent months, the Biden administration has been working to prevent a further deterioration in relations, 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 going there on Sunday.

But new investment restrictions from the United States could exacerbate tit-for-tat measures as the two countries try to establish a “floor” under their ties.

The new measures appear to have been largely settled for several months. But the Biden administration appears to have delayed announcing them in view of strained relations with China. Some details continue to be debated even by US government agencies. Once the restrictions are proposed, the private sector will have time to comment on the limits, which could shape how they are implemented.

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

Lawmakers and other supporters of the measures have complained that the current system allows US capital to flow to China and finance technologies that could ultimately pose a threat to US national security. The United States already blocks American companies from selling certain advanced technologies directly to China, and monitors investments by Chinese companies in the US for potential security risks. But the US government has little knowledge of and no control over money moving from the United States to China.

Roger W. Robinson Jr., former chairman of the Congressional US-China Economic and Security Review Commission, testified in May that “China has used, directed and manipulated Western greed to advance its strategic goals to unprecedented, dangerous levels.” ” House hearing.

Members of the Biden administration spent much of last year considering how widely to implement the investment restrictions, with officials reaching out to business executives to get their views on the impact of such a move. Industry groups and venture capitalists have lobbied aggressively against a comprehensive ban on investment in China, saying it would be disruptive to important business ties and ultimately harm the US economy.

The administration appears to have landed on a narrowly tailored measure that would require companies to provide more information to the government about their planned investments in China, while barring investments in certain sensitive sectors with military or surveillance applications. Will go

In a hearing before the Senate Banking Committee in May, Paul Rosen, the Treasury’s assistant secretary for investment protection, said the administration was seeking to “craft a narrow and focused program” to restrict investment in certain sensitive technologies with national security implications. was working”.

Both supporters and critics acknowledge that the measure’s greatest significance lies in what it could mean for future regulation. They say the new regulations are unlikely to have much impact on China’s technology development in the short term, as the country has no shortage of investment funds.

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 direct investment in both 2021 and 2022. In the first quarter of this year, investment in China by US venture capital and private equity firms fell to about $400 million, down from a peak of about $35 billion in 2021, Mr. Lardy said.

But total domestic investment in China in the quarter was $1.5 trillion, he said, adding that US venture capital and private equity flows “don’t even have a rounding error.”

Nevertheless, the new rules could prove important by setting a precedent for restrictions on private sector investment in China. They could be a tool US officials use in times of tension with China, and a policy approach that could spread to advanced democracies in the coming years.

In a Group of 7 meeting in May, US officials discussed the possibility of aligning such policies with close allies. A report published this year by the Center for Strategic and International Studies noted that both South Korea and Taiwan have their own sets of investment restrictions. Taiwan’s regulations create specific rules on outbound investment in China based on the type of technology and include prohibitions for high-tech sectors.

China imposed its limits on outbound investment in 2016. Beijing has steered the country’s companies and families away from betting on American real estate and even soccer clubs by buying foreign businesses in aircraft production, heavy manufacturing, artificial intelligence, cyber security. and other strategic areas.

The Treasury Department will likely be the government agency responsible for enforcing the new restrictions. Ms. Yellen has been careful that if poorly designed, they could undermine the traditionally open investment climate in the United States.

Ms. Yellen on CBS’s “Face the Nation” Sunday. She said 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 have heard the justification given by the United States for the possible sanctions, but it was unclear whether they agreed with the reasoning.

Chinese officials are also keeping a watchful eye on the Biden administration for issuing a variety of export restrictions on the types of advanced chips that can be shipped to China. The administration is considering new measures that could limit the ability of Chinese companies to gain access to state-of-the-art artificial intelligence capabilities. through cloud services, Sanctions issued last October barred Chinese companies from directly buying such products.

Despite such wide areas of disagreement, Mr. Sobel, a former Treasury Department official, suggested that the United States and China still have little choice but to keep talking to each other.

He added, “We’re in the same boat together, and that means they just have to talk and be together – whether they’re happy with each other or not.”

Keith Bradsher Contributed reporting.

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