Looming U.S. Investment Restrictions on China Threaten Diplomatic Outreach

A series of diplomatic visits to Beijing will try to defuse tensions between the United States and China as the White House moves forward with plans to impose new restrictions on U.S. investment in Chinese companies involved in quantum computing, artificial intelligence and semiconductors. efforts to do so may be undermined.

The impending restrictions were at the center of discussions between Treasury Secretary Janet L. Yellen and Chinese officials during a four-day visit to China that ended Sunday.

The Treasury Department is trying to narrow its limits, limiting private equity and venture capital investments to limited but highly strategic areas. The ministry has also tried to allay concerns within China that the measure amounted to a technology blockade aimed at hurting the Chinese economy.

Still, such actions are expected to anger China and will be the first test of the new communication channels that the world’s two largest economies are trying to recover.

“They will be concerned about our investment policy in China,” said Mark Sobel, a former Treasury official who is now the U.S. chairman of the Forum on Government Monetary and Financial Institutions. “The Chinese side has a problem with us and both sides are quite clear that there is tension.”

Relations between the United States and China have recently reached their weakest point in years. Tensions have risen over the flight of a Chinese surveillance balloon over the United States, tightening US technology restrictions, China-Russia cooperation during the Ukraine war, and China’s continued threats to Taiwan.

In recent months, the Biden administration has worked to stem a deterioration in relations seen as a potential threat to global peace and stability. In addition to Yellen, Secretary of State Antony J. Brinken visited Beijing last month, and President Biden’s special envoy for climate change, John Kerry, is also due to travel to Beijing on Sunday.

But new investment restrictions by the United States could further escalate the retaliatory measures that the two countries have been deploying just as they are trying to put a “bottom” in bilateral relations.

The new measures appear to have been largely frozen for months. But the Biden administration appears to have delayed the announcement due to the turmoil in relations with China. Some of the details are still being discussed with US government agencies. If restrictions are proposed, the private sector will have time to comment on them, which may determine how they are implemented.

Even if the Biden administration decides to delay the implementation of the measures further, it will face increasing pressure from lawmakers considering its own broader restrictions on investment in China.

Lawmakers and other supporters of the measure say the current system allows U.S. capital to flow to China, ultimately funding technology that could pose a threat to U.S. national security. complains that there are The U.S. already bans U.S. companies from selling certain advanced technologies directly to China and monitors investments by Chinese companies in the U.S. for potential security risks. But the U.S. government has little insight into, or control over, the movement of funds from the U.S. to China.

Roger W. Robinson Jr., former chairman of the Congressional U.S.-China Economic and Security Review Committee, said, “China is exploiting, manipulating, and manipulating Western greed to push its strategic objectives into unprecedented danger. We’ve taken it to the next level,” he testified before Congress in May. In-hospital hearing.

Members of the Biden administration spent much of last year weighing how broadly to apply investment restrictions, with officials contacting business executives to see if such a move could give We asked for feedback on the impact. Industry groups and venture capitalists have vigorously lobbied against a broad ban on investment in China, arguing that it would destroy important business relationships and ultimately hurt the U.S. economy.

The administration has a very narrow policy of requiring companies to report more information to the government about their plans to invest in China, while banning investments in some sensitive areas with military or surveillance applications. It seems that measures have been decided according to the scope.

At a Senate Banking Committee hearing in May, Assistant Secretary of the Treasury for Investment Security Paul Rosen said the administration would limit investments in certain classified We are working on developing a program that will

Supporters and critics alike agree that the biggest implications of the measure are what it means for future regulation. The new rules themselves are unlikely to have a large impact on China’s technological development in the short term, they said, as China does not have a shortage of investment capital.

Less than 5% of China’s inward FDI in both 2021 and 2022 will come from the United States, said Nicholas R. Rardy, a non-resident senior fellow at the Peterson Institute for International Economics. said. U.S. venture capital and private equity firms’ investment in China has fallen from a peak of about $35 billion in 2021 to about $400 million, Rardy said.

But China’s total domestic investment in the quarter was $1.5 trillion, he said, adding that the influx of U.S. venture capital and private equity “isn’t even a rounding error.”

Still, the new rules could have important implications as they set a precedent for restricting private sector investment in China. These could be tools that U.S. officials turn to in times of tension with China, and could be a policy approach that could spill over to advanced democracies in the years to come.

At the G7 meeting in May, US officials discussed the possibility of coordinating such policies with close allies. A report released earlier this year by the Center for Strategic and International Studies noted that South Korea and Taiwan each have their own investment limits. Taiwan’s rules place special restrictions on foreign investment in China based on the type of technology, including a ban on high-tech sectors.

China set its own limits on foreign investment in 2016. The Chinese government has encouraged Chinese businesses and households to stop speculating on U.S. real estate and even football clubs and instead buy foreign companies in aircraft manufacturing, heavy industry, artificial intelligence and cybersecurity. and other strategic sectors.

The government agency responsible for enforcing the new restrictions is likely to be the Ministry of Finance. Ms. Yellen has warned that mishandling could undermine America’s traditionally open investment climate.

Yellen appeared on the CBS show “Face the Sunday” on “The Nation.” He added that the regulation “should not have a material impact on the investment environment between the two countries.”

A senior Treasury official said Chinese officials had heard the U.S. justification for possible restrictions, but were unsure if they would agree with the rationale.

Chinese officials also fear the Biden administration will impose various export restrictions on the types of advanced chips that can be sent to China.The administration is considering new measures that could tighten restrictions on the ability of Chinese companies to access cutting-edge artificial intelligence capabilities. Via cloud service. Restrictions issued last October prevented Chinese companies from buying such products directly.

Despite such wide-ranging disagreements, former Treasury official Sobel suggested the U.S. and China still had little choice but to continue dialogue.

“We’re in the boat together, which means they just have to talk and get along, whether they’re happy with each other or not,” he said.

Keith Bradshire contributed to the report.

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