US Unveils Outbound Investment Restrictions for China's Chip, Quantum, AI Sectors

The Biden administration this week unveiled its plans for a new outbound investment screening regime, which will restrict investments in three advanced technology sectors in China and set notification requirements for other sensitive outbound investments. The new screening regime, outlined in an executive order signed Aug. 9 by President Joe Biden, will come into force after the Treasury Department writes regulations. The agency is soliciting public comments on how it should implement the program, set certain definitions, impose due diligence requirements and more as part of an advance notice of proposed rulemaking released along with the order.

The regime, which the administration has been working on for months (see 2307170029), will prohibit investments in entities operating in China’s quantum information technology, artificial intelligence and semiconductor/microelectronics industries. The screening requirements will capture investments that “confer intangible benefits” -- such as technological “know-how” -- that come with private equity investments, venture capital investments, joint ventures and greenfield investments, a senior administration official said. Investments could be captured if they are made in certain “countries of concern” outlined in the executive order, which currently lists China, Hong Kong and Macau.

The regime will not seek to restrict passive investments or other transactions that are “less likely to benefit an entity seeking to advance in these advanced technology areas,” the official said, adding that the restrictions are aimed at being "narrowly targeted."

“The thing we're trying to prevent is not money going into China overall, because they have plenty of money. The thing they don't have is the know-how,” the official said during a call with reporters. “The know-how we’ve seen is often connected to specific types of investments, and that isn't necessarily seen when it comes to passive investments in the Chinese stock market.”

The ANPRM includes proposed definitions, items and activities that could be considered part of the three technology sectors. Treasury listed abbreviated versions of their scope in a fact sheet:

• Semiconductors and microelectronics: Entities developing electronic design automation software or semiconductor manufacturing equipment; designing, fabricating, or packaging advanced integrated circuits; and installing or selling of supercomputers.
• Quantum information technologies: Entities producing quantum computers and certain components; developing certain quantum sensors; and developing quantum networking and quantum communication systems.
• AI systems: Entities working with software that incorporates an AI system and is designed for end-uses that may have military or intelligence applications that pose national security risks, such as military surveillance end uses.

Once the regulations are finalized, the administration also will require investors to notify the government of certain investments, including those made in entities that have ties to the design, fabrication and packaging of less advanced semiconductors, an administration official said. Treasury said the notification requirements and investment prohibitions will apply to U.S. persons “wherever they are located.”

Treasury’s ANPRM said the program will look to block private U.S. investments, including acquisitions of equity interests through mergers and acquisitions, various private equity “arrangements” and certain “debt financing transactions that are convertible to equity.” Treasury also said it’s considering creating an exemption for certain types of passive and other investments that pose smaller risks, such as American investments in public securities, index funds, mutual funds, exchange-traded funds, certain investments made as a limited partner, committed but uncalled capital investments and intracompany transfers of funds from a U.S. parent company to its subsidiary.

A U.S. official said the administration has “no expectation” of adding other technology areas during the rulemaking process that could be subject to the prohibitions. Comments are due by Sept. 28.

The ANPRM said Treasury doesn’t plan to oversee a “case-by-case review” of outbound investments. “Rather, the Treasury Department expects that the transaction parties will have the obligation to determine whether a given transaction is prohibited, subject to notification, or permissible without notification.”

Officials declined to say whether the U.S. will pursue criminal violations for investors that violate the prohibitions or notification requirements. “I think you would be jumping the gun significantly to think about criminal penalties here,” an official said, but added that the Treasury secretary will have “all the powers and duties” under the International Emergency Economic Powers Act, which will “include unwinding these investments.”

But “the goal here really is to make sure that we provide industry with clarity so that they recognize what is permissible, which is a great deal of investments, and what is impermissible, which is going to be a narrow scope of investments,” the official said. The administration also plans to make sure it has "experts who will be able to give guidance to industry as they're thinking through this.”

The announcement comes after lawmakers for months pushed for new rules to screen sensitive investments in China. The Senate in July passed its version of the FY 2024 National Defense Authorization Act with an amendment that could establish a notification regime for, but not restrict, certain outbound investments (see 2307280052), but has so far not been able to pass the National Critical Capabilities Defense Act, a broader piece of legislation that would give the administration the authority to screen and block certain outbound investments (see 2305090046).

The restrictions outlined in the executive order will focus on a narrower set of technology industries than some lawmakers had advocated for, including the top Republican on the House Select Committee on China, who urged Biden earlier this month to include “five to six priority sectors” and eventually expand to more (see 2308040025).

An administration official said they “commend” lawmakers for efforts to introduce outbound investment screening legislation and pointed to the “overwhelmingly bipartisan vote” to add the notification measure to the NDAA. “In the coming weeks and months,” the official said, “we look forward to working to align our approaches in developing an outbound regime that best advances our national security.”

U.S. officials also said the U.S. has been working closely with allies on the screening requirements, and said trading partners are “seeking to align our approaches together to maximize the effectiveness of our efforts collectively.” An official specifically mentioned the Group of 7 countries and the EU, which said it plans to release an outbound investment screening proposal later this year (see 2306260056 and 2306200052).

“We've already had dozens of engagements with hundreds of stakeholders, industry members and allies and partners around the world,” the official said. “We are expecting much more engagement as part of the notice and comment period to make any needed adjustments before the rule goes into final effect.”

The U.S., including Treasury Secretary Janet Yellen, also spoke with China about the executive order before releasing it this week, an official said. The U.S. wanted “to make very clear to them that our goal is to make sure that we protect our national security.”

Reps. Rosa DeLauro, D-Conn., and Bill Pascrell, D-N.J., who introduced the House version of the National Critical Capabilities Defense Act, said in an emailed statement they are “pleased” the administration “listened to our calls for executive action” but urged the White House to “go further." They said they “will fight in Congress for broader statutory authority to become law.”

Sen. Marco Rubio, R-Fla, called the restrictions too “narrowly tailored” and “almost laughable. It is riddled with loopholes, explicitly ignores the dual-use nature of important technologies, and fails to include industries China’s government deems critical. The U.S. needs to do better than this.” He said he plans to introduce legislation this month to create an outbound investment regime that “actually protects American economic and national security interests.”