America's intention to tighten investment in China

These areas of investment control are not entirely new ideas. Some companies with ties to the Chinese military are restricted from accepting investments. The US Chip Act also prohibits companies receiving government subsidies from making investments that could benefit China's semiconductor industry.

According to the Economist , the tightening regulations will likely affect only a small part of US investments in Chinese companies, with accumulated by the end of 2021 more than 1 trillion USD. According to data from research firm Rhodium Group, US companies have made $120 billion in foreign direct investment in China and $62 billion in venture capital (VC) investments over the past decade.

However, tightening regulations for investors to go still comes with risks. One is that setting rules that are too broad can restrict capital flows and burden investors for no good reason. Second, figuring out which investments are likely to leak technological know-how is not easy.

A tech giant looking to expand its investment efforts in the advanced computer sector in China could easily identify a regulatory breach. However, the operation of investment funds will be more complicated. For example, a fund may acquire a company but provide no operational advantage. While, a small venture capital investment can come with technical expertise that is worth protecting.

According to the Center for Security and Emerging Technologies, a Washington-based policy research unit, between 2015 and 2021, US investors' capital - including venture capital funds from Intel and Qualcomm - accounted for 37 % of the $110 billion raised by Chinese AI companies.

The return of American pension funds has made them benefit from such investments. For example, GGV Capital is one of the most active US investors in Chinese AI companies, according to data from PitchBook. GGV Capital has also received about $2 billion from six other funds with total assets of $600 billion over the past decade.

The national security risk posed by the United States from such investments is an open question. Can Chinese domestic investors take the place of funding if U.S. investors are restricted?

Some argue that the Biden administration should give a more definite answer before asking pension and wealth managers - which often have exposure to hundreds of global hedge funds - to trace of Chinese technology companies in their portfolios.

Another danger is the possibility of ambiguity, which is difficult to control. Under Mr Biden, economic policy and national security have become increasingly indistinguishable .

Last year, the president directed the Committee on Foreign Investment in the United States (CFIUS), which oversees investment in the United States, to take on the task of looking at broader factors including supply chain resilience. response.

With offshore investment, a thorough evaluation of a deal on the basis of common national interest standards can be difficult to enforce. It is bureaucratic concerns that have led some to propose control with existing punitive policies.

Graphics: Economist

Another problem is that while Biden's initial policy on foreign investment was supposed to limit deals that threatened national security, there was no shortage of political hawks outside the House. White uses it as an intervention tool for broader industrial policy.

In 2021, a bipartisan group of congressmen introduced an outbound investment screening bill broad enough to affect more than 40% of US investment in China, according to the Rhodium Group. Last month, an updated version was announced. It would establish restrictions on investment not only in advanced technology but also in industries including auto manufacturing and pharmaceuticals, and give the White House the power to expand the list.

The increase in trade restrictions is not limited to the US. The G7 meeting in May had a commitment on this issue. The impact on Western investment in China will depend on the final scope of restrictions agreed.

While still projections, actual US investment has declined. Venture capital flows to China have plunged more than 80% since their peak in 2018. One of the reasons is the deteriorating business environment in China.

This month, Sequoia, a major US venture capital firm, announced it would spin off its China business in 2024. As a result, hawkish policymakers are now reassured that capital flows have narrowed. they don't need to take action.