The Biden administration is preparing new rules that would restrict U.S. dollars from flowing to China.
By Ana Swanson and Lauren Hirsch Feb. 9, 2023
WASHINGTON — Growing concerns about China’s military and economic ambitions have lawmakers and the White House weighing yet another effort to restrict Beijing’s access to advanced technologies that could be used in war.
This time, the U.S. government appears poised to extend its restrictions to a new area: American dollars that are used to finance the development of such technologies within Chinese borders.
For months, the Biden administration has been preparing curbs on the investments that U.S. firms can make in China, particularly in areas like advanced computing.
Those measures are now largely complete and could be issued within two months. The Treasury Department has been reaching out to other governments, including the European Union, to try to ensure that they do not rush in to provide similar financing to China after the United States cuts it off, according to people familiar with the discussions.
The voyage of a spy balloon across the United States has set off newfound fears about the national security threats posed by the Chinese government. This week, lawmakers on both sides warned the White House that if the administration did not move ahead with investment restrictions, Congress would propose its own.
At a hearing on Tuesday aimed at publicizing the security threat from China, Representative Blaine Luetkemeyer, Republican of Missouri, said it was the “committee’s job to examine all interconnections between the Chinese and U.S. economy, specifically connections supporting China’s military and human rights abuses, and pursue options to eliminate U.S. capital flowing into those areas.”
Representative Maxine Waters, Democrat of California, said the United States needed to make sure that “hedge funds, private equity firms and Wall Street are not investing in ways that hurt our economy or funding the adversarial actions of the Chinese government.” 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.
Details of the pending executive order remain unclear, but it is expected to require companies to report more information to the government about their planned investments in certain adversarial countries. Several people familiar with the plans said the order would most likely prohibit outright investments in some sensitive areas, like quantum computing, advanced semiconductors and certain artificial intelligence capabilities with military or surveillance applications.
U.S. officials have also increasingly been concerned about China’s use of biotechnology, but several people said the administration had decided to exclude the sector, at least initially.
Supporters of investment restrictions say they would help fill in a significant hole in the economic barriers that the United States is setting up with China. The government already prohibits U.S. companies from directly selling certain advanced technologies to China, and it has long monitored the investments that Chinese companies make in the United States for potential security risks.
But the government has little control over or insight into money traveling from the United States to China, said Claire Chu, a senior China analyst at Janes, a defense intelligence firm. Support has been building for the government to take more oversight of these kinds of deals, she said.
“It’s not so much a matter of whether this will happen as when,” Ms. Chu said.
Some of the proposals have prompted resistance from industry groups, which argued that overly broad restrictions could overwhelm government officials in charge of oversight, creating big delays, and ricochet back on the U.S. economy, harming its competitiveness.
A broader proposal in Congress last year to review outbound investments in critical sectors including infrastructure and medicine prompted pushback from groups like the U.S. Chamber of Commerce and the U.S.-China Business Council.
“Industry is kind of united: We don’t want this,” said Antonia Tzinova, a partner at the law firm Holland & Knight who specializes in national security reviews of investments into the United States.
The Biden administration’s plan appears to be much more narrowly targeted at a few sensitive sectors. But some industry representatives remain concerned that measures that apply only to U.S. firms, and not their foreign competitors, could put American businesses at a disadvantage.
Others say that China has access to plenty of other sources of funding worldwide, and that cutting off access would prevent U.S. companies from benefiting from Chinese innovations. “Getting the details right on outbound investment screening is easier said than done,” said Rory Murphy, the vice president of government affairs for the U.S.-China Business Council. “These are technical and complicated sectors, and the details are critical.”
He added that his group wanted to “help policymakers thread the needle of achieving their national security objectives while not going too broad and putting U.S. companies at a competitive disadvantage.”
Investment firms including Blackstone, KKR, Sequoia, Carlyle Group, Bain Capital, Silver Lake, General Atlantic and Warburg Pincus all have notable exposure to China. According to tracking by Rhodium Group, a research firm with a focus on China, U.S. investors have been carrying out about 3,000 transactions per year in China, including both foreign direct investment and venture capital deals, with about 500 of those valued at more than $1 million.
Bill Ford, the chief executive of General Atlantic, an investment firm, has expressed his views about possible regulation directly with Commerce Secretary Gina Raimondo, a person familiar with the matter said.
General Atlantic says it has invested nearly $7 billion in China since 2000 with more than 34 portfolio companies in the country. One of its highest-profile investments there, ByteDance, the parent company of TikTok, has found itself in the cross hairs of the debate over how to manage U.S.-Chinese financial ties.
Depending on how it is put into effect, this new tool could fundamentally alter the country’s financial relationship with China, one of America’s largest trading partners but also a primary geopolitical rival.
U.S. companies spent about $11 billion in 2022 buying or investing in Chinese companies, according to the data service firm Dealogic. While that is a small slice of the more than $1.5 trillion that U.S. companies invested globally that year, China deals are still considered valuable because they may provide venture firms access to innovation and, possibly, their next big win.
Venture firms, which seed earlier-stage companies, have been particularly active in the region. According to data compiled by Pitchbook, for example, the investment firm GGV Capital did 105 deals from 2021 to 2022; GSR Ventures did 95. Other notable names on the list include Tiger Global Management, which did 27 deals in the same period. Intel’s venture capital firm did 17 deals in the same period, while Qualcomm’s venture arm did 16.
Until very recently, the U.S. government’s role was to try to expand financial ties with China. For example, greater access for American financial services firms was one major part of the trade deal that President Donald J. Trump reached with Chinese officials in 2020.
At a White House ceremony where he signed the deal into law, Mr. Trump name-checked executives from Citadel, Carlyle, Goldman Sachs and Blackstone, some of whom had become unofficial back channels with the Chinese government during negotiations for a trade pact that could prove lucrative to their businesses.
One major part of the trade deal that President Donald J. Trump reached with Chinese officials in 2020 was greater access for American financial services firms.
Pete Marovich for The New York Times
“Steve, I know you have no interest in this deal at all,” Mr. Trump said sarcastically to Stephen A. Schwarzman, the chief executive of Blackstone Group, who was seated in the audience at the White House. “I’m surprised you’re not actually sitting over here on the ledge of the stage.”
Since that trade deal was signed, U.S. attitudes toward China have turned even more negative and suspicious. The Chinese government has embraced a system of techno-authoritarianism that has used U.S. technologies to surveil dissidents in China and abroad. It has also become clear that some private Chinese tech firms have fed into Beijing’s efforts to develop military technologies, like hypersonic missiles.
The Biden administration has steadily placed more restrictions on selling advanced technology to China, expanding the initial restrictions that Mr. Trump issued against Chinese firms like Huawei.
It remains to be seen whether the administration’s planned restrictions will mollify lawmakers who are calling for tough restrictions, or prompt Congress to propose more draconian measures.
Lawmakers previously considered imposing broader restrictions as part of a bill aimed at building up American semiconductor manufacturing that passed last year. But those measures were stripped out of the final legislation, partly because of how expansive they were.
In September, a group of top lawmakers sent a letter to the Biden administration urging it to take action to review investments in adversarial countries like China.
In a government spending bill that President Biden signed late last year, Congress included $20 million for the Commerce and Treasury Departments to begin to set up teams to review such investments. It also instructed them to submit a joint report by later this month describing the potential program and the resources it would need.
Ana Swanson reported from Washington, and Lauren Hirsch from New York.
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. @AnaSwanson
Lauren Hirsch joined The Times from CNBC in 2020, covering deals and the biggest stories on Wall Street. @laurenshirsch