The Biden administration has introduced new rules for US investments in China, signaling national security priorities. Under these rules, certain US persons will be required to notify the US government in advance of making certain types of investment in People’s Republic of China (PRC) entities. The focus of the regulations will be on entities engaged in activities related to covered national security technology or products. These new rules aim to address narrow national security threats posed by China and its territories of Hong Kong and Macau.
The White House released an Executive Order on August 9, directing the Treasury Department to develop a new regulatory system for these notifications in consultation with the Commerce Department. The order also prohibits US persons from engaging in certain investment transactions with covered foreign parties. The Treasury Department, in conjunction with the interagency, will identify the types of transactions and technologies that may pose a risk to US national security and warrant notification or prohibition.
The order’s release resolves a long and sometimes confusing policy discussion surrounding outbound investment activities. The main point of contention was whether the United States needed new authorities to protect national security and, if so, what those authorities should look like. The Biden administration’s executive order aims to settle this debate.
It is important to note that the new regulations will not cover passive investment or investments related to critical supply chains or technologies such as biotechnology or the green energy transition. The order’s focus is narrower than proposed legislation like the National Critical Capabilities Defense Act (NCCDA) and the Outbound Investment Transparency Act (OITA). The administration’s order is specifically designed to address national security threats and is not intended to harm the Chinese economy or address broader economic competition concerns.
The order directs the development of regulations that will define prohibited and notifiable transactions for US persons. These regulations will cover various non-passive investment activities, including mergers and acquisitions, venture capital, private equity, convertible debt financing, greenfield investment, and joint ventures. The regulations will not cover most passive investments, such as investments in publicly traded securities.
The target of these regulations will be entities organized under the laws of the PRC, with a principal place of business in the PRC or territories of Hong Kong and Macau, or majority-owned by PRC individuals or entities. The Treasury-led interagency has released an Advanced Notice of Proposed Rulemaking (ANPRM), asking for public feedback on key unresolved questions to design a notification and prohibition rule that effectively protects national security without being overly restrictive.
While China has responded by accusing the US of using these regulations for decoupling and chain-breaking, the scope of the order and its potential regulations is more limited than portrayed. It is crucial to monitor the further definition and implementation of these regulations.
The Biden administration’s introduction of new rules for US investments in China reflects the administration’s commitment to national security interests. The focus is on addressing narrow national security threats related to sensitive technologies and products critical for military, intelligence, surveillance, or cyber-enabled capabilities. These rules aim to strike a balance between protecting national security and maintaining economic relations.
