Photo by Markus Winkler on Unsplash
Not long ago, President Biden authorised the order to ban United States (US) investments in some Chinese firms over national security reasons, further encouraging friction and tension between the two countries. This is part of the US’s de-risking plan with China. This time though, at the expense of investors. From the US’ perspective, the move makes sense, in that it limits support towards China on the technological and military dimension. Biden and the US certainly feel that it seems irrational that their own firms are strengthening arguably their biggest adversary by investing in industries like semiconductors, quantum computing and artificial intelligence, thus such a policy was implemented. Now, this essay seeks to detail the possible impacts of the executive order towards American investors and China.
Now, for American investors, there is a mixed impact and reaction to the policy. Some investors have long expected this and were unfazed by the news. US-based venture capital investment in China, though once was at a significantly high amount, has already decreased drastically over the years, as geopolitical tensions have risen, showing the possible limited impact of the restrictions on US investors. On the other hand, some are worried about an extension of the restriction by the US to investments in other sectors and public Chinese stocks. The belief is that if such a framework is already created, it would be easier for the government to add more sectors to restrict in the future. Such beliefs are further reinforced with both democrat and republican members calling for more restrictions across more sectors like biotechnology and energy. While no concrete measures have been implemented, the uncertainty generated is enough to lead to further decreases in investment flows. According to a spokesman in the Chinese embassy in Washington, there are still about 70,000 US firms doing business in China, indicating that the impact might be significant. Hence, there will be a negative impact to investors who have been doing business in China.
As for China, certainly they will see this move as a hostile one, one that is done to contain its rise. As China has declared, it feels that the move is a politicisation and weaponization of trade. Evidently, there is a good chance that China would retaliate and implement its own policies against the US. Some forms of retaliation could be the restriction of exports of rare earths in consumer electronics and electric vehicles or it could even be targeted at other US technology companies. Though, actually, the direct impact of such a move on Chinese technological firms isn't as drastic as it seems. This is especially true because the bans on AI for example, are limited to only software that can be used for military or mass surveillance purposes. Other investments in AI that are not related to military or surveillance use could be exempted from the restriction. Yet, the question lies on how an investment is defined as a threat to national security. Most investments into China are still mostly unrestricted as of now. However, again, the more significant impact is probably the uncertainty, as investors in other sectors might also pull back their funds in fear of more restrictions imposed in the near future. Hence, while the restrictions seem to be narrow, it has the potential to significantly impact investment flows into China’s economy.
In conclusion, while the policy certainly makes a lot of sense for the US in preserving national security, the executive order is expected to negatively impact both US investors and Chinese firms. On one end, there is now growing uncertainty on whether US investors doing business in China can continue. On the other hand, Chinese firms also suffer from the drop in investment flows, and it would definitely push China to bolster its efforts of attaining self-sufficiency. As for the rest of the world, countries and entities like the United Kingdom and the European Union have been considering moving along the same lines as well. In due time, we will find out how severe the impacts will be and whether the US will expand on the restrictions or whether China will retaliate strongly against these orders.
References
https://amp.theguardian.com/world/2023/aug/09/biden-executive-order-us-investment-chinese-technology
Comments