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Treasury seeks tighter rules on US investment in China tech

Ban would cover certain AI, quantum computing and semiconductor manufacturing activities

The proposal is an “important step” in safeguarding national security, says House Appropriations ranking member Rosa DeLauro.
The proposal is an “important step” in safeguarding national security, says House Appropriations ranking member Rosa DeLauro. (Bill Clark/CQ Roll Call file photo)

The Treasury Department is moving to close gaps on U.S. investment flowing into China’s tech sector left unaddressed by Congress and earlier actions by the Biden administration.

A proposal issued late last month would outright prohibit investment by U.S. citizens and residents in specific technologies within artificial intelligence, quantum computing, and semiconductor manufacturing that officials say must be addressed.

The bans include outlays for design automation software and fabrication of certain high-end semiconductors. The proposal would bar investments in development and production of quantum computers and their critical components, as well as quantum sensing and certain communications platforms. And it aims to stop U.S. capital from flowing into artificial intelligence systems with national security end uses, as well as those that require a certain threshold level of computing power or are trained using biological sequence data.

In addition to the outright bans, investments in semiconductor manufacturing, AI, and quantum computing that fall outside the specific areas of prohibition would require notification within 30 days of a transaction.

Public comments are due by Aug. 4, though there’s no expected date yet for a final rule.

The Treasury Department action is the latest step in a process that began in August 2023 when President Joe Biden issued an executive order prohibiting private equity and venture capital investments in China’s sensitive technology sectors if they would help Beijing gain new military capabilities. It’s also part of a larger effort that includes export controls on sensitive technologies to slow down China’s technological advances.

Biden’s order emerged after Congress tried but opted not to pass such prohibitions into law; key lawmakers then called on the president to act.

“The proposed rule put forward by the Treasury Department on U.S. outbound investment is an important step forward in strengthening U.S. competitiveness while safeguarding our supply chains and national security,” Rep. Rosa DeLauro, D-Conn., said in an email.

DeLauro, the top Democrat on the House Appropriations Committee, is the author of legislation in the last Congress that called for screening U.S. capital flowing into Chinese tech. It passed the House with bipartisan support but not the Senate.

“We cannot fuel the Chinese Community Party’s policies with our capital and capabilities,” DeLauro said. “We have already seen what offshoring critical capabilities has done to our economic and national security — not to mention our industrial base and workforce.”

In May the House Foreign Affairs Committee advanced legislation that would allow the Commerce Department to restrict exports of military-grade AI systems to China. The measure also would allow the administration to prohibit Americans from working with foreign nationals to develop AI systems that pose a risk to U.S. national security.

‘Frontier’ AI, biotech

Between 2015 and 2021, at least $40.2 billion, or about 37 percent, of the $110 billion in capital raised by Chinese artificial intelligence companies involved U.S. investors, according to a 2023 report by the Center for Security and Emerging Technology at Georgetown University’s Walsh School of Foreign Service.

The proposed rule seeks to cover investments in AI technologies that would have specific military end uses, including weapons development, target identification and combat simulation.

But it also would expand investment prohibitions to the development of powerful AI systems known as frontier models, said Ngor Long, a senior research analyst at Georgetown’s CSET. The proposed rule intends to set the boundary for prohibitions based on the computing power such AI models would use, Long said.

The Treasury Department is considering setting the general computing power threshold at 1 septillion computational operations, or higher, for training of advanced models, the proposal says. That’s a 1 followed by 24 zeros.

In anticipation of the coming investment restrictions, venture capital firms and tech companies already have started adjusting their strategies to avoid running afoul of new regulations, said Chuck Blanchard, senior counsel at the law firm of Arnold & Porter.

During the comment period, investors and tech companies are likely to seek “more precision” on what falls “under the category of advanced integrated circuit design versus normal integrated circuit design,” Blanchard said in an interview.

Separately, the Commerce Department has been tightening rules on exports of advanced semiconductor chips to China. In October, the department set additional performance thresholds for semiconductors, meaning that chips that exceed either capability can’t be exported to the country.

Companies also are interested in understanding what the Treasury Department is likely to do with transactions that require notification, Blanchard said. “Right now the notifiable transactions appear to be just a heads-up as opposed to any kind of clearance requirement” or obtaining any approval from the department, he said.

Although the latest proposed rule is narrowly focused on technologies that are critical to national security, investors and tech companies are watching to see if the administration expands it to include the biotech sector, Blanchard said.

Lawmakers have pushed to block such investments. In January former Rep. Mike Gallagher, R-Wis., and Rep. Raja Krishnamoorthi, D-Ill., unveiled legislation that would prohibit U.S. agencies from contracting with companies that obtain equipment or services from certain Chinese biotech companies, including BGI Genomics Co. Ltd.

Expanding prohibitions on investments in China’s tech sector to include the biotech sector “would be wrongheaded,” Blanchard said. If a Chinese biotech company “develops the next great cancer remedy, we want U.S. investors to get some of the upside of that, and we also want to encourage a successful commercialization of that technology,” he added.

The Treasury Department regulations based on the president’s executive order are “just one piece of the puzzle,” DeLauro said.

“But the administration can only act within the bounds set by Congress — and it’s up for Congress to act now,” DeLauro said, adding that she would continue to advocate legislation that she first proposed in 2021.