U.S. Prepares New Rules on Investment in China

Biden administration expected to seek money in its budget next week to set up program regulating investment abroad

· The Treasury and Commerce departments said they were considering a new regulatory system to address U.S. investment in advanced technologies abroad that could pose national security risks

The Biden administration is preparing a new program that could prohibit U.S. investment in certain sectors in China, a new step to guard U.S. technology advantages during a growing competition between the world’s two largest economies.

In reports provided to lawmakers Friday on Capitol Hill, the Treasury and Commerce departments said they were considering a new regulatory system to address U.S. investment in advanced technologies abroad that could pose national security risks, according to copies of the reports viewed by The Wall Street Journal.

The reports said the Biden administration may prohibit some investments while also potentially collecting information about other investments to inform future steps.

While the reports didn’t identify specific technology sectors the Biden administration views as risky, it said sectors that could advance rivals’ military capabilities would be a focus of the program.

People familiar with the work on the new program expect it to cover private-equity and venture-capital investments in advanced semiconductors, quantum computing and some forms of artificial intelligence. U.S. officials want to prevent American investors from providing funding and expertise to Chinese companies that could improve the speed and accuracy of Beijing’s military decisions, for example.

The Treasury report said the program would focus on “preventing U.S. capital and expertise from being exploited in ways that threaten our national security while not placing an undue burden on U.S. investors and businesses.”

The reports also don’t identify which countries would fall under the new rules, though the people familiar with the matter say they expect the Biden administration’s work on the new rules would in practice largely deal with U.S. investments in China.

In the reports, the Treasury and Commerce departments said they expected to finalize their policy on the issue in the near future. Both agencies said they expected to seek additional resources for the investment program in the White House budget, which will be released next week. The new program will be subject to public comment, and the Treasury would administer it in consultation with the Commerce Department, according to the reports.

The federal government has long scrutinized foreign investment into the U.S., in some cases barring foreign investment in sensitive areas through an interagency panel called the Committee on Foreign Investment in the U.S.

But rules regulating U.S. investment abroad would be a new step, part of a broader effort by the Biden administration to hamper China’s ability to develop technologies that U.S. officials believe could pose a national security risk. Last year, the U.S. imposed new export restrictions on advanced semiconductors and chip-manufacturing equipment aimed at slowing China’s military advance.

A group of Democrats and Republicans last year pushed for the creation of new rules regulating U.S. investment in China. Rep. Rosa DeLauro (D., Conn.), the top Democrat on the House Appropriations Committee, required the administration to prepare a report on the topic as part of last year’s annual spending package.

“This report is a good first step to ensure U.S. investment does not fuel the Chinese Communist Party’s capabilities and create dangerous dependencies,” Ms. DeLauro said in a statement. “It lays the groundwork for the work we hope to do long term—it sets up the structure to advance U.S. interests, which should also be used to address other critical dependencies in addition to those described in the report.”

The Biden administration has been working on an executive order establishing the new investment rules for months, according to the people familiar with the plan. Setting the scope of the new potential controls has been a challenge, though, as officials consider the specifics of how U.S. investors would comply with the new rules.

Within Biden administration deliberations on the topic, Treasury officials have sought to keep the order tailored to specific national-security threats. At a recent public event, Deputy Treasury Secretary Wally Adeyemo said the U.S. should craft the investment program rules to address national-security risks—and not create an unfair economic advantage.

“One of the most important things we can do from my perspective is to make sure we draw clear lines between what is competition and what is national security,” he said. “Those lines are sometimes hard to define but it’s important for us to define them.”

Biden administration officials are also reaching out to close allies in the Group of Seven advanced democracies to build support for the concept of restricting investment into China.

The G-7 will host a series of high-level meetings in May, when the group could endorse the idea. A European Union official said conversations with the U.S. on controlling U.S. investment abroad were ongoing, though the official said the EU was far behind the U.S. in creating such an investment program.

Sequoia Capital, one of the world’s largest venture-capital firms, has already started screening new investments in Chinese semiconductor or quantum-computing companies as it prepares for the new U.S. rules, the Journal has reported.