What Biden’s Executive Order Means for US Investors in China

BEIJING — The Biden government long awaited executive order on US investments in Chinese companies leaves open many questions about how it will be implemented.

Its 45-day public comment period gives US investors significant potential to influence any final regulation, the analysts said.

“The executive order obviously provides a summary of what the scope of the program will look like,” said Brian P. Curran, partner, global regulator at the Washington, DC law firm Hogan Lovells.

“It’s not even a proposed rule. It’s not a final rule.”

american president Joe Biden on Wednesday signed an executive order aimed at restricting US investment in Chinese semiconductor, quantum computing and artificial intelligence companies on national security grounds.

Treasury Secretary Janet Yellen is primarily responsible for determining the details. Her department has published a fact sheet and a long “Advance Notice of Proposed Regulation” with specific questions you would like more information on.

Companies may share information confidentially as needed, per the advance notice, which is which will be formally published on Monday. The notice said it is just a means to share Treasury’s initial considerations, and will be followed by a draft regulation.

“The final scope of the restriction, which will be defined by the Treasury Department after public consultations, including with US investors in China, will be critical to the implementation of the order,” said Winston Ma, an associate professor of law at NYU and former managing director of CIC.

This week’s announcements do not explicitly ban US investment in Chinese companies, but the documents indicate what policymakers are focusing on.

Potentially covered US transactions include:

• Acquisition of equity interests, for example, through mergers and acquisitions, private equity and venture capital;
• Greenfield investments;
• joint ventures;
• Certain debt financing operations.

The upcoming regulations will not take effect retroactively, the Treasury said. But the Treasury said it can request information on transactions completed or agreed upon since the issuance of the executive order.

“We have been advising clients prior to the issuance of the executive order, it makes sense to look at their exposure to the types of transactions that have the potential to be covered by the regime,” Curran said.

Any plans to invest in the sectors mentioned in the public materials must undergo additional consideration of risks and how to manage them, he said.

Here are the areas of concern:

semiconductors — Treasury is considering banning technology that enables the production or improvement of advanced integrated circuits; design, manufacturing and packaging capabilities for advanced integrated circuits; and installation, or sale to third parties, of certain supercomputers.

Treasury is also considering a notice requirement for transactions involving the design, manufacture, and packaging of other integrated circuits.

The US government is concerned about technology that “will support military innovations,” the prior notice said.

quantum computing — The Treasury is considering banning transactions involving the production of quantum computers, sensors and systems.

However, the Treasury said it is considering not requiring investors to notify it of transactions in this sector.

The US government is concerned about quantum information technologies that could “compromise encryption and other cybersecurity controls and jeopardize military communications,” the advisory said.

Artificial intelligence — The Treasury is considering banning US investments in the development of software that uses AI systems designed for military, government intelligence or mass surveillance use only.

Treasury said it can also require Americans to notify it if they engage in transactions involving AI systems for cybersecurity applications, digital forensics tools, control of robotic systems, and facial recognition, among others.

However, the Treasury said that its intention is not to touch entities that develop artificial intelligence systems only for consumer applications and other uses that do not have national security consequences.

The Treasury said it expects to exclude certain investments in exchange-traded securities or exchange-traded funds.

The following transactions are not configured to be included by the next regulation:

• University-to-University Research Collaborations
• Contracts to purchase raw materials.
• intellectual property licenses
• Bank loans and payment processing
• subscription
• debt rating
• prime brokerage
• global custody
• stock market research

Treasury requests written comments on its advance notice by September 28.

He notice includes far-reaching requests of data on investment trends. He also asked questions about the effective threshold requirements and definitions, and details about the resulting burdens on US investors: “If such limitations existed or were required, how could investment firms change the way they raise capital from US investors? if they do?”

Among the many other questions, Treasury asks for areas within the three general categories in which US investments in Chinese entities “would provide a strategic benefit to the United States such that continuing such investment would benefit, and not harm, national security.” of the United States”. “

“There are plenty of opportunities for the public to comment on what should be covered and what should not be covered,” said Anne Salladin, partner, global regulator, at Hogan Lovells. “I think it’s an extraordinarily good opportunity for customers to get involved on that front.”

“This has been under consideration by the administration for a couple of years,” he said. “One of the things that is important is to take (the regulatory process) at a slow pace to understand what the ramifications are for American companies.”

Given the lengthy process, the next regulations are not expected to go into effect until next year.

Yet the niche industry of China-based venture capitalists, who raise funds from American investors to invest in Chinese startups, many focused on technology, is already struggling.

Fewer than 300 unique US-based investors have participated in China-based venture capital deals since 2016 each year, with just 64 participating so far this year, according to Pitchbook.

China’s VC deal activity in the second quarter continued a recent decline, to the lowest level since the first quarter of 2017, according to Pitchbook.

The data showed that China VC deal activity involving US-only AI investors has declined since the first quarter of 2022. Pitchbook reported hardly any such deals in quantum computing since 2021, while semiconductors experienced moderate activity during the first half of this year.

Industry and political developments also mark a change in the overall risk environment.

“The kind of bill that Biden (plans) is small but important because once the state starts meddling in these things, it creates more dramatic possibilities,” said Jonathan Levy, a University of Chicago professor of economic history and author of “ Ages of American Capitalism: A History of the United States”.

While saying he had no sources within the Biden administration, Levy said recent events tell him the US government does not want the new economic relationship with China “to consist of US investment funds investing in high Chinese technology because we believe that high technology is a kind of strategic interest.

“I also think that more fundamentally, I don’t know what kind of relationship they have in mind, (but) there will be a new order. We want to shape to some degree what that (order) looks like.”

— CNBC’s Amanda Macias contributed to this report.