The Treasury Department is working to fill gaps in U.S. investment in China’s technology sector left unaddressed by Congress and previous actions by the Biden administration.
A proposal released late last month would outright ban U.S. citizens and residents from investing in specific technologies in artificial intelligence, quantum computing and semiconductor manufacturing that officials say need to be addressed.
The bans include spending on design automation software and the manufacturing of certain high-end semiconductors. The proposal would prohibit investments in the development and production of quantum computers and their critical components, as well as quantum sensing and certain communications platforms. It also seeks to prevent U.S. capital from flowing into artificial intelligence systems with national security end uses, as well as those that require a certain level of computing power or are trained using biological sequence data.
In addition to outright bans, investments in semiconductor manufacturing, AI, and quantum computing that do not fall within the specific areas of prohibition would require notification within 30 days of a transaction.
Public comments are due by August 4, although there is no anticipated date for a final rule.
The Treasury Department’s move is the latest step in a process that began in August 2023 when President Joe Biden issued an executive order banning private equity and venture capital investments in China’s sensitive technology sectors if they would help Beijing acquire new military capabilities. It’s also part of a broader effort that includes export controls on sensitive technologies to slow China’s technological advances.
Biden’s order came after Congress tried but chose not to enact such bans into law; leading lawmakers then called on the president to act.
“The Treasury Department’s proposed rule on U.S. outbound investment is an important step in strengthening U.S. competitiveness while preserving our supply chains and national security,” Rep. Rosa DeLauro, a Connecticut Democrat, said in an email.
DeLauro, the Democratic leader of the House Appropriations Committee, authored a bill in the last Congress that called for screening U.S. capital that infiltrates Chinese technology. That bill passed the House with bipartisan support, but not the Senate.
“We cannot fuel the policies of the Chinese Communist Party with our capital and capabilities,” DeLauro said. “We have already seen the consequences of offshoring critical capabilities on our economy and national security, not to mention our industrial base and workforce.”
In May, the House Foreign Affairs Committee introduced a bill that would allow the Commerce Department to restrict exports of military-grade AI systems to China. The measure would also allow the administration to prohibit Americans from working with foreign nationals to develop AI systems that pose a risk to U.S. national security.
“Frontier” AI and Biotechnology
Between 2015 and 2021, at least $40.2 billion, or about 37%, of the $110 billion in capital raised by Chinese artificial intelligence companies involved U.S. investors, according to a 2023 report from the Center for Security and Emerging Technology at Georgetown University’s Walsh School of Foreign Service.
The proposed rule aims to cover investments in AI technologies that would have specific military end uses, including weapons development, target identification, and combat simulation.
But it would also extend investment bans to the development of powerful AI systems known as frontier models, said Ngor Long, a senior research analyst at Georgetown’s CSET. The proposed rule aims to draw the line on the bans based on how much computing power those AI models would use, Long said.
The Treasury Department is considering setting the general threshold for computing power at 1 septillion compute operations or more for training advanced models, the proposal says. That’s a 1 followed by 24 zeros.
In anticipation of the upcoming investment restrictions, venture capital firms and technology companies have already begun adjusting their strategies to avoid running into conflict with the new regulations, said Chuck Blanchard, senior counsel at law firm Arnold & Porter.
During the comment period, investors and tech companies are likely to seek “more clarity” on what falls “under the category of advanced IC design versus regular IC design,” Blanchard said in an interview.
Meanwhile, the Commerce Ministry has tightened rules on exports of advanced semiconductors to China. In October, the ministry set additional performance thresholds for semiconductors, meaning chips that exceed either of those capabilities cannot be exported to the country.
Companies also want to know what the Treasury Department is likely to do about transactions that require notification, Blanchard said. “Right now, notifiable transactions appear to be just notification, rather than any requirement for authorization” or obtaining any approval from the department, he said.
Although the latest proposed rule is narrowly focused on technologies critical to national security, investors and tech companies are watching to see if the administration expands it to include the biotech sector, Blanchard said.
Lawmakers have pushed to block such investments. In January, former Rep. Mike Gallagher, a Wisconsin Republican, and Rep. Raja Krishnamoorthi, a Illinois Democrat, unveiled legislation that would bar U.S. agencies from contracting with companies that obtain equipment or services from certain Chinese biotech companies, including BGI Genomics Co. Ltd.
“It would be unwise to extend investment bans on China’s technology sector to the biotech sector,” Blanchard said. “If a Chinese biotech company develops the next big cure for cancer, we want American investors to benefit, and we also want to encourage successful commercialization of that technology,” he added.
The Treasury Department’s regulations based on the executive order are “only one piece of the puzzle,” DeLauro said.
“But the administration can only act within the limits set by Congress — and it’s up to Congress to act now,” DeLauro said, adding that she would continue to advocate for the legislation she first proposed in 2021.
