U.S. and China Poised to Drift Further Apart After Investment BanPresident Biden’s order comes on top of a slowing Chinese economy, Covid lockdowns and rising tensions between the two powers
WASHINGTON—After years of blacklisting Chinese companies and scrutinizing their investments in the U.S., the Biden administration is sending an unmistakable signal to American business to steer investment away from China.
An executive order President Biden issued Wednesday—while narrowly targeted at critical leading-edge technologies with military, surveillance and cyber capabilities—more broadly aims to reorder the flow of American capital and expertise away from its biggest global rival.
The order prohibits U.S. investment in advanced semiconductors and quantum computing, and requires American investors to notify Washington about investments in other types of semiconductors and artificial intelligence. It also bars U.S. citizens and permanent residents from taking part in prohibited deals.
In doing so, White House officials said, the order intends to deny China the know-how, market access and other benefits U.S. venture-capital and private-equity firms bring with their investments. That is likely to further rattle American companies doing business in China, coming on top of weakening Chinese growth, Covid lockdowns that made travel to China difficult and a recent pressure campaign against U.S. and other foreign companies amid rising tensions between Washington and Beijing.
Andrew Polk, a partner with the boutique research firm Trivium China, said that while U.S. companies he advises remain interested in China’s market, many have grown hesitant.
“What we always say—and this resonates with our clients—is that the risk-adjusted return in China has changed dramatically,” Polk said. “So what we see is a lot of companies fundamentally rethinking their China strategies. It doesn’t mean they’ll necessarily change them, but they’re stress testing them now, because we’re clearly in a new environment.”
Wednesday’s order lands in the middle of a fragile nursing of relations by Washington and Beijing after months of bruising tensions, over Taiwan, the Ukraine war, espionage and technology controls. In the short term, officials and security specialists said, the fragile diplomatic progress of recent months is likely to hold.
Chinese leader Xi Jinping sees a calm in relations with the U.S., at least temporarily, as a boost to his prestige at home as the economy slips into deflation while growth falters and foreign investment plummets. A senior Chinese Foreign Ministry official, Yang Tao, held discussions with State Department and other officials in Washington last week with a prime focus on preparing for Xi to attend a summit of Asia-Pacific leaders in San Francisco in November and convene separate talks with Biden, according to people briefed on the discussions.
Both sides also pushed ahead to repair communication channels, agreeing tentatively this month to set up working groups to discuss Asia-Pacific regional and maritime issues, officials said. Discussions are still under way for Commerce Secretary Gina Raimondo to travel to Beijing, perhaps later this month, in what would be the fourth visit by a senior Biden administration figure since June.
Longer term, however, the U.S. and China are locked in rivalry, driving them to disentangle the economic and commercial ties that for decades gave ballast to relations, and the new investment restrictions are likely to accelerate the momentum to draw further apart.
“That talk of diversification, de-risking, decoupling, disentangling—choose your ‘D-word,’ whichever one you like—it’s really baked into the minds in Washington, increasingly in Silicon Valley, and this is really being beamed right at Wall Street,” said Liza Tobin, a former National Security Council official now with the Special Competitive Studies Project, a Washington-based group focused on technology policy.
Venture-capital firms, which once poured into China energetically, have already pulled back responding in part to sharpening tensions; U.S. investment in Chinese startups fell by more than 30% from 2021 to 2022 and is on pace to fall further this year, according to Crunchbase data.
Lightspeed Venture Partners, for example, a California-based venture firm that launched its China arm in 2006, has pared its investment in Chinese startups out of U.S. funds because of the risk, according to a person familiar with the firm.
“The real message to come out of this move is that it’s an enduring trajectory” that companies and investors must consider, said Nate Picarsic, a fellow at the Foundation for Defense of Democracies and co-founder of supply-chain intelligence firm Horizon Advisory. “Geopolitical and national security risks have become a permanent fixture.”
As the executive order took shape in recent months, Chinese officials urged the U.S. not to adopt it and accused Washington of trying to stymie China’s development. After the order’s unveiling Wednesday, the Chinese Embassy in Washington expressed Beijing’s disappointment and said the U.S. is weaponizing trade and backtracking on statements to maintain economic relations.
“The U.S. side has repeatedly expressed its non-intention to ‘decouple’ with China, but what it actually did is repeatedly ‘decoupling and severing supply chains’ from China,” embassy spokesman Liu Pengyu said in a statement. “It has continuously escalated suppression and restrictions on China.”
Disputes over technology and market access, which have simmered for years, erupted into sharper conflict in the middle of the past decade after Xi’s government outlined plans to dominate leading-edge sectors and increased pressure on foreign companies to transfer proprietary technologies.
Moves by the Trump administration to blacklist suppliers to China’s military and to intensify screening of Chinese investment in the U.S. were followed by a broad Biden administration ban on the transfer of advanced semiconductors, the equipment to make them and the involvement of U.S. citizens and permanent residents in that sector. The U.S. also got allies Japan and the Netherlands to follow suit.
China retaliated, introducing controls on exports of minerals critical to green technologies and banning products from U.S. chip maker Micron Technology in key infrastructure.
Treasury Secretary Janet Yellen, in a trip to Beijing last month, tried to allay Chinese concerns about the investment restrictions, then under discussion, and head off retaliation. She said that she explained that the measures were intended to be narrow in scope and done for national-security purposes, not for economic advantage, and that she expected Beijing would do likewise.
“National security is something that we can’t compromise about and we will protect, and we will do so even if it harms our own narrow economic interests. But that when we take such actions, which do have an effect on the Chinese economy, that we will make sure that they are transparent, narrowly targeted, and well-explained,” Yellen said last month on CBS’s “Face the Nation.”
“I would point out that the Chinese also protect their own national security through export controls and other similar devices,” Yellen said.
While the statement Wednesday from the Chinese Embassy didn’t suggest retaliation, Chinese officials have said that Beijing is likely to do so, given that Xi has put priority on standing up for China’s interests. If Beijing does, it is likely to choose carefully to avoid hurting its companies and further weakening the economy.
One particular vulnerability is technologies for electric vehicles and solar power, where China dominates supply chains. Picarsic, of the Foundation for Defense of Democracies, said he sees the investment restrictions rippling out, affecting U.S. investors’ willingness to dive into other sectors, particularly ones such as biotechnology, which could enhance military or police capabilities.
“The structural fundamentals here are ones of competition and escalation, and I don’t think there’s anything that we’ve seen so far—from the U.S. government signaling around this move, Chinese expectations and potential reactions—that would suggest any break from that,” he said.