Inspenet, June 23, 2023.
Investments by US companies in China have taken on a ghostly character: always imminent and delayed. In recent months, the debate on the subject has aroused increasing suspense. In March, the US Departments of the Treasury and Commerce submitted reports on possible rules. The following month, Jake Sullivan, President Joe Biden’s security adviser, followed up on the policy in a speech and is expected to follow an executive order from Biden.
When Biden’s executive order appears, it is likely to focus on investments in three “force multiplication” technologies: advanced semiconductors, artificial intelligence (AI) and quantum computing. The exact permutation of the bans and notification requirements remains unclear, but the rules will affect only a small part of US investments in Chinese companies, which were worth more than $1 trillion at the end of 2021.
According to data from the Rhodium Group, a research firm, American companies made $120 billion of foreign direct investment in China and $62 billion of venture capital (vc) investment over the past decade.
US investments shrouded in uncertainty?
Geopolitical brakes on US capital are not new, as some companies with ties to China’s military are off-limits to investors. For its part, the law prohibits companies that receive its subsidies from making investments that could benefit China’s semiconductor industry. Proponents say the outbound investment rules are a necessary extension of the patchwork of US trade restrictions: if export controls prevent Chinese companies from buying some dual-use technologies and inbound investment controls prevent them from seizing the American companies that make them, American capital should not be allowed to finance the development of the technology in China.
Putting limits on US investors carries risks. Paul Rosen, a Treasury official, said in May that the rules would focus on “investment dollars that come with knowledge and experience.” For their part, European leaders say restrictions are needed to prevent “knowledge leakage.” But figuring out what kind of investment has such leaks is tricky. A tech giant hoping to expand its advanced computing efforts in China probably won’t meet this standard, but the case for investment firms and their end investors is less straightforward.
According to the Center for Security and Emerging Technology, in the past 8 years various US investors participated in funding rounds that accounted for 37% of the $110 billion raised by China AI companies. The return appetite of US pension funds has made them beneficiaries of such investments, including GGV Capital, one of the most active US investors in China AI companies, according to PitchBook data. “Our analysis of public disclosures suggests that six US pension and endowment funds with combined assets exceeding $600 billion have committed about $2 billion.”
The national security risk presented by such investments is an open question. So is whether Chinese investors could in any case replace funding if US investors were constrained. Some feel the Biden administration should come up with stronger answers before it requires asset managers and pension funds, which typically have exposure to hundreds of global investment funds.
Another danger is the fact that economic policy and national security policy under Biden have become increasingly indistinguishable. Last year the president led the Committee on Foreign Investment in the United States (CFIUS), the US watchdog for inward investment, which has seen its caseload explode in recent years, to consider broader factors, including the resilience of Supply Chain. Screening outbound investments based on broad national interest standards could become unwieldy. Fears of a growing investment bureaucracy have led some to suggest using existing sanctions rules instead.
Although Biden’s initial policy on foreign investment is expected to be more limited, there is no shortage of those who envision outward investment screening as a tool for industrial policy. In 2021, a bipartisan group of congressmen introduced a bill to test outbound investment broad enough to have affected more than 40% of US investment in China, according to the Rhodium Group. An updated version of the bill was released last month, which would place restrictions on investments not only in high-tech, but also in industries including auto manufacturing and pharmaceuticals and give the White House the authority to expand the list.
Source: https://www.economist.com/
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