As President Joe Biden’s recent executive order clamps down on certain U.S. technology investments in China, investors are bracing for more stringent measures amid escalating tensions between the world’s two largest economies.
The order, which aims to prevent U.S. capital and expertise from aiding China’s military modernisation and jeopardising U.S. national security, has effectively put U.S. private equity and venture capital investors on high alert. This is particularly noticeable in sensitive technology areas where relations have steadily deteriorated since the Trump administration, over issues including tech, China’s industrial policies, and national security.
While the order specifically targets new investments, it still sends a clear signal that further scrutiny of American investments in China is imminent. This comes at a challenging time for China as it struggles to recover from the COVID-19 pandemic, according to dealmakers and analysts.
Regulatory Impact and Future Legislation
The executive order grants the Treasury Secretary the authority to restrict or prohibit U.S. investments in Chinese corporations involved in semiconductors, microelectronics, quantum information technologies, and certain AI systems.
Additional legislation that builds upon Biden’s restrictions may be introduced, warned Weiheng Chen, senior partner and head of Greater China practice at law firm Wilson Sonsini. “Certain U.S. investors may just choose to wait for the implementation rules before making investment decisions in these covered sectors,” Chen said.
Congressional Republicans criticised the Democrat-led initiative, arguing it does not go far enough.
Shift Towards Yuan Investments
U.S. acquisitions of Chinese companies have plunged nearly 60% this year to $3.5 billion, down from $8.8 billion during the same period last year, according to data from Dealogic. Meanwhile, deal value in the tech sector has plummeted to $815 million from $6.1 billion.
These figures reflect the shifting landscape of U.S-China relations and Beijing’s regulatory crackdown on its private enterprises. In response, many fund managers are pivoting from the country or transitioning to local-currency investments.
Beijing’s Response
Despite the tightening U.S. restrictions, Pan Yuan, a researcher at the Chinese Academy of Social Sciences, a top government think tank, believes that China will continue its open policy to attract foreign capital.
In response to Biden’s executive order, China’s commerce ministry expressed “grave concerns” and reserved the right to retaliate. However, analysts predict that Beijing’s retaliation options are limited and unlikely to escalate the situation, especially under the intense scrutiny since the Trump era.
“The main Chinese reaction will be to discourage other countries from copying American actions,” said Derek Scissors, a senior fellow and expert on U.S.-China economic relations at the American Enterprise Institute. He further added that while China could retaliate in other ways, “the executive order is barely going to do anything, and China escalating would risk turning a molehill into a mountain.”
