In a significant move aimed at safeguarding national security, President Joe Biden signed an executive order on Wednesday that restricts certain United States investments in sensitive technology in China. The order, which comes amid escalating tensions between the US and China, focuses on three key sectors: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems. Biden stated in a letter to Congress that a national emergency was being declared to address the threat posed by countries like China in sensitive technologies critical to military, intelligence, surveillance, and cyber capabilities.

The executive order grants authority to the US Treasury Secretary to prohibit or restrict specific US investments in Chinese entities within the targeted sectors. While senior administration officials emphasize that the order is driven by national security concerns rather than economic interests, they maintain that the scope of the categories covered is narrow. The objective is to curtail China's ability to leverage US investments in its technology companies to enhance its military capabilities while preserving crucial levels of trade that are vital to both economies.

The move is expected to exacerbate tensions between the two largest economies globally, though US officials emphasize that the restrictions are aimed at addressing the most pressing national security risks rather than severing the highly interdependent economic relationship between the countries. Senate Democratic Leader Chuck Schumer lauded Biden's order, asserting that American investments have long contributed to the rise of the Chinese military and that the US is now taking a strategic first step to prevent such funding. Schumer called for Congress to enshrine restrictions in law and refine them.

The Chinese embassy in Washington warned that the new limits would significantly undermine the interests of both Chinese and American companies and investors. The embassy accused the US of habitually politicizing technology and trade issues and using them as tools and weapons under the guise of national security. The order is primarily focused on private equity, venture capital, joint ventures, and greenfield investments. Most investments falling under the order will require government notification, and some transactions will be prohibited. However, certain exemptions are anticipated, including publicly-traded instruments and intracompany transfers from US parents to subsidiaries.

The Biden administration emphasized that it engaged with US allies and partners in developing the restrictions and will continue close coordination with them to advance shared goals. The executive order reflects discussions with the Group of Seven (G7) countries. Implementation of the order is expected next year, following multiple rounds of public comment, including an initial 45-day comment period. Regulators plan to issue an advance notice of proposed rulemaking to further define the program's scope and solicit public feedback before making a formal proposal.

The measures are part of the Biden administration's broader efforts to impede Beijing's development of next-generation technologies with potential military applications. By limiting US corporate investments in sectors such as advanced semiconductors, artificial intelligence, and quantum computing in China, the administration aims to prevent US capital and expertise from supporting China's military modernization and threatening US national security. The rules, which will undergo a public comment period before finalization, are not expected to take effect for at least a year.

While the initial plans to limit US investment were more extensive, the regulations were narrowed after months of engagement with the private sector. Concerns were raised by American executives who feared that restricting US capital flow to China could harm US businesses and have adverse effects on the domestic economy. The Chinese market, with over 1 billion consumers, is a crucial market for many American companies. Earlier this year, Secretary of State Antony Blinken and Treasury Secretary Janet Yellen visited Beijing separately to help ease tensions, with Yellen assuring Chinese counterparts that the executive order would be highly targeted and not have broad-based impacts on the Chinese economy.

Nevertheless, China's ambassador to the United States, Xie Feng, warned that Beijing would respond to the restrictions. He stated that China would not make provocations but would not flinch from provocations either. The measures come as China and the US find themselves increasingly engaged in a technological arms race. Last year, the US Commerce Department announced restrictions on sales of advanced technology to China, aimed at hindering China's domestic manufacturing capabilities and impeding the development of supercomputers and certain weapons. Secretary of State Blinken has previously emphasized the need to protect sensitive technology that could be used against the US, while maintaining a limited scope of impact.

The limitations on US investments in China coincide with a challenging period for Beijing's economy, which has been severely impacted by the country's stringent COVID-19 lockdown measures. China's consumer sector recently experienced deflation, and factory-gate prices have continued to decline, increasing pressure on the Chinese government to implement more direct policy stimulus. Additionally, a report revealed a decrease in US companies and consumers' demand for Chinese-manufactured products, reflecting a growing trend of shunning such goods.

Overall, the executive order signed by President Biden seeks to strike a delicate balance between safeguarding national security concerns and maintaining the economic relationship between the US and China. The restrictions on US investments in sensitive technology sectors in China are intended to impede the country's military advancement while avoiding severe disruptions to trade and the global economy. The order reflects the Biden administration's determination to protect key US technologies from potential misuse and ensure that American investments do not contribute to the Chinese military's rise.