The Biden administration plans on Wednesday to issue new restrictions on American investments in some advanced industries in China, according to people familiar with the deliberations, a move that supporters have described as necessary to protect the national security but will undoubtedly rank Beijing.
The proposal would be one of the first significant steps taken by the United States amid an economic conflict with China to curb financial outflows. This could set the stage for more restrictions on investments between the two countries in the coming years.
The restrictions will prevent private equity and venture capital firms from making investments in some high-tech sectors, such as quantum computing, artificial intelligence and advanced semiconductors, the people said, in a bid to stop the transfer of American dollars and expertise to China.
It would also require companies making investments in a wider range of Chinese industries to report that activity, giving the government better visibility into financial exchanges between the United States and China.
The White House declined to comment. But Biden officials It emphasized that the outright investment restrictions would narrowly target certain sectors that might help China’s military or surveillance state as they try to combat security threats but would not interfere with legitimate business in China.
“There is increasing evidence that US capital is being used to advance China’s military capabilities and the US does not have adequate means to counter this activity,” said Emily Benson, the director of the trade and technology project at Center for Strategic and International Studies. , a think tank in Washington.
The Biden administration has recently sought to calm relations with China, sending Treasury Secretary Janet L. Yellen and other senior officials to hold talks with Chinese counterparts. In recent speeches, Biden officials have argued that the targeted actions taken against China are aimed at protecting US national security, not harming China’s economy.
At the same time, the Biden administration has continued to push to “de-risk” critical supply chains by building suppliers outside of China, and it has continued to increase its restrictions on the sale of certain technologies to China, including semiconductors for advanced computing.
The Chinese government has long restricted certain foreign investments by individuals and companies. Other governments, such as those of Taiwan and South Korea, there are also restrictions in outward investments.
But beyond screening Chinese investment in the United States for security risks, the US government has left financial flows between the world’s two largest economies largely untouched. Just a few years ago, American policymakers were working to open up China’s financial markets for US companies.
In the past few years, investments between the United States and China have fallen sharply as the countries cut other economic ties. But venture capital and private equity firms continue to seek lucrative opportunities for partnerships, as a way to gain access to China’s vibrant technology industry.
The planned move has already faced criticism from some congressional Republicans and others who say it goes too far and doesn’t go far enough to limit US funding of Chinese technology. In July, a House committee on China sent letters to four US venture capital firms expressing “serious concern” about their investments in Chinese companies in areas including artificial intelligence and semiconductors.
Others have argued that the restriction would primarily put the US economy at a disadvantage, as other countries continue to forge technology partnerships with China, and China has no shortage of capital.
Nicholas R. Lardy, a nonresident senior fellow at the Peterson Institute for International Economics, said the United States will be the source of less than 5 percent of China’s inward direct investment in 2021 and 2022.
“Unless other major investors in China adopt similar restrictions, I think it’s a waste of time,” Mr. Lardy said. “Pushing this policy now only plays into the hands of those in Beijing who believe the US is out to contain China and is not interested in renewed dialogue or a ‘thaw.'”
Biden officials have spoken with allies in recent months to explain the proposal and encourage other governments to adopt similar restrictions, including in Group of 7 meetings in Japan in May. Since then, Ursula von der Leyen, the president of the European Commission, has urged the European Union to introduce its own proposal.
The administration is expected to give businesses and other organizations an opportunity to comment on the new rules before they are finalized in the coming months.
Claire Chu, a senior China analyst at Janes, a defense intelligence company, said negotiating and implementing the proposal would be difficult, and that officials would have to work closely with Silicon Valley and Wall Street.
“For a long time, the US national security community has been wary of recognizing the international financial system as a potential domain of combat,” he said. “And the business community has pushed back against what it considers the politicization of private markets. And so it’s not just an interagency effort, but an exercise in intersectoral coordination.