President Joe Biden has signed an executive order aimed at restricting high-tech investments in China, in a move that reflects the intensifying competition between the two global powers. The order specifically focuses on advanced computer chips, microelectronics, quantum information technologies, and artificial intelligence. While the Biden administration asserts that this action is driven by national security concerns rather than economic interests, it also aims to prevent China from leveraging U.S. investments in its technology companies to enhance its military capabilities. The order seeks to strike a balance between limiting China’s access to advanced technologies while preserving vital trade relationships between the two nations.
The United States and China find themselves increasingly embroiled in a geopolitical rivalry characterized by conflicting values. While the Biden administration maintains that it does not intend to decouple from China, it has retained restrictions on the export of advanced computer chips and the tariffs imposed by former President Donald Trump. Concurrently, China has cracked down on foreign companies operating within its borders.
President Biden has suggested that China’s economy is struggling and its global ambitions have been curtailed. The U.S. has reinvigorated its alliances with key partners, such as Japan, South Korea, Australia, and the European Union. The administration has consulted with its allies and industry stakeholders in shaping the executive order.
The officials who previewed the order emphasized that China has exploited U.S. investments to advance its military modernization efforts. While the new limits are designed to avoid disrupting China’s economy, they will complement last year’s export controls on advanced computer chips, which elicited objections from Chinese officials. The Treasury Department will introduce a proposed rulemaking with definitions that align with the presidential order, and the public will have the opportunity to provide feedback during the comment process.
The executive order’s objectives include requiring investors to notify the U.S. government about certain transactions involving China and imposing restrictions on select investments. The order primarily targets areas such as private equity, venture capital, and joint partnerships, where investments from countries of concern, including China, could potentially enhance their knowledge and military capabilities.
J. Philip Ludvigson, a lawyer and former Treasury official, characterized the order as an initial framework that could expand over time to encompass other sectors.
The issue of restricting investment in China enjoys bipartisan support, with the Senate adding requirements to monitor and limit investments in countries of concern, including China, in an amendment to the National Defense Authorization Act passed in July. However, there are calls for more assertive action against China, with some suggesting a complete halt to all U.S. investment in China’s critical technology and military companies.
President Biden has referred to Chinese President Xi Jinping as a dictator following the shooting down of a Chinese spy balloon over the United States. Tensions have also risen over the status of Taiwan, with Biden accusing China of employing coercive tactics regarding its independence. While China has supported Russia after its invasion of Ukraine in 2022, Biden has noted that their friendship does not extend to shipping weapons.
The U.S. Chamber of Commerce has held multiple meetings with the White House and federal agencies during the order’s preparation, aiming to ensure that the measure is targeted and administrable.
The issuance of this executive order has long been anticipated by U.S. officials, but it remains uncertain how financial markets will interpret it – as a measured step or a further escalation of tensions at a delicate moment.
China’s economic growth has faltered since emerging from pandemic-related lockdowns. The country’s National Bureau of Statistics reported a 0.3% decline in consumer prices in July compared to the previous year, indicating a lack of consumer demand that could impede growth.
Foreign direct investment in China also fell sharply, declining 89% in the second quarter of this year compared to the same period in 2022, according to data released by the State Administration of Foreign Exchange. Chinese researchers suggest that most foreign investment is channeled through Chinese companies disguised as foreign capital to benefit from tax breaks and other incentives.
However, foreign business groups highlight that global companies are increasingly diverting their investment plans to other economies. Growing concerns over tighter security controls and a lack of progress on promised reforms have eroded foreign companies’ confidence in China. Calls from President Xi and other leaders for greater economic self-reliance have left investors uncertain about their future in China’s state-dominated economy.
