On Friday, June 21, the US Department of the Treasury issued a proposed rule notice further restricting American individuals and companies from investing in China, aimed at curbing Chinese acquisition of US funding in semiconductor, quantum information, and artificial intelligence development.
Last August, President Biden signed an executive order limiting foreign investment, and after the initial review period, the Treasury Department released the proposed rules and accompanying explanations on Friday. These rules require US individuals and companies to understand which transactions will be restricted or prohibited.
According to a press release from the Treasury Department, the proposed new rule (Notice of Proposed Rulemaking, NPRM) aims to implement Executive Order 14105 of August 9, 2023, to address investment issues in certain sensitive technologies and products related to national security in targeted countries (Foreign Investment Order).
The US government is taking action to prevent targeted countries from utilizing US foreign investment to develop sensitive technologies or products crucial to next-generation military, intelligence, surveillance, or cyber capabilities, posing national security risks to the United States.
President Biden has designated Communist China, as well as Hong Kong and Macau Special Administrative Regions, as targeted countries and regions. “The rapid advancement in semiconductor and microelectronics, quantum information technology, and artificial intelligence capabilities… significantly enhances their capacity to engage in activities that threaten US national security,” stated Biden in last year’s executive order.
Public comments on the new regulations are due by August 4, indicating the US is likely to implement the new rules by the end of this year as anticipated.
The more detailed regulations released on Friday clearly indicate the US’s growing concern with artificial intelligence development. A senior official from the Treasury Department mentioned in a conference call with reporters that the government aims to prevent China from developing AI applications that could be used for weapon targeting or large-scale surveillance operations like location tracking.
The Treasury Department press release states that the Foreign Investment Order specifically directs the Secretary of the Treasury to issue regulations banning certain transactions involving technologies and products that pose significant national security threats to the United States and requires US persons to report other transactions involving technologies and products that might threaten US national security.
Which areas are affected? The new rules cover three categories of national security technologies and products: semiconductor and microelectronic technologies, quantum information technology, and artificial intelligence.
Assistant Secretary for Investment Security at the US Department of the Treasury, Paul Rosen, stated in the press release that the proposed rule aims to promote US national security by preventing certain US investments from directly or indirectly supporting the development of sensitive technologies that threaten national security.
The Treasury Department emphasized that the new rules aim to implement a “narrow and targeted national security program,” focusing on certain foreign investments from targeted countries.
Treasury Secretary Yellen stated last year that the investment control in the program will focus, complementing existing export controls. The Biden administration announced a new export ban in October 2022, further tightening technology and equipment exports related to chips, AI, and quantum computing to China, signaling an escalation in US-China tech war.
The proposed new rule released on Friday will prohibit certain AI transactions for specific end-uses and transactions involving systems trained on specific computing capacities but will also require notification to the government for transactions related to developing non-prohibited AI systems or semiconductors.
The initial investment restrictions primarily focused on China, Macau, and Hong Kong, but US officials mentioned that the scope could expand in the future.
Former Treasury Department official and lawyer at Washington’s Akin Gump law firm, Laura Black, told Reuters that the Treasury Department is trying to narrow the scope of the rules as much as possible but is cautioning companies seeking to invest in China.
“When US investors invest in China or operate in regulated industries involving Chinese companies, a broader due diligence is needed,” she said.
Restricted investment types include equity acquisitions, debt financing convertible to equity, greenfield investments, joint ventures, and certain investments made as limited partners in non-US collective investment funds.
Black explained that the rules put US-managed private equity and venture capital funds, as well as some US limited partners’ investments in foreign managed funds and convertible bonds under regulatory scrutiny.
She added that certain Chinese subsidiaries and parent companies will be subject to the rules, which will also prohibit US companies from certain investments in third countries.
The aim of these new rules is to prevent US funds from assisting Communist China in developing military modernization capabilities in these areas.
According to the regulations, individuals violating the rules may face criminal and civil penalties, and investments may be revoked.
The Treasury Department stated that certain transactions identified as solving national security issues or third-country transactions fully addressing national security issues may receive exemptions.