US May Limit Investments in China's Artificial Intelligence and Technology Sector

The White House has prepared an executive order aimed at imposing restrictions on direct investments in Chinese high-tech companies, primarily those whose revenues are at least partially derived from quantum computing, artificial intelligence (AI), and advanced semiconductor development. Reports from The Wall Street Journal (WSJ), The New York Times (NYT), and Bloomberg, citing sources, indicate that the new measures, justified by national security concerns, will not take effect until 2024 at the earliest and will not apply to previous investments made prior to this announcement.

According to WSJ, the new regulations will technically extend to investments in companies from several countries considered adversaries to the US, including Russia, but will practically affect investments related specifically to the People's Republic of China (PRC). Under the proposed rules, American private and venture investors will be prohibited from making investments in Chinese firms involved in quantum encryption, AI, and cutting-edge semiconductor development. Additionally, a source speaking to Bloomberg affirmed that a complete ban on investments in AI would only extend to those Chinese companies supplying products to the military, while government notification would be necessary for other cases, suggesting that exceptions might also apply in the fields of quantum computing and chips.

Investors who violate these regulations will face penalties and the threat of divestiture of their stakes, according to WSJ. It is important to note that the new rules cannot be applied retroactively and will not affect portfolio investments in Chinese stocks and bonds.

Bloomberg reports that the new restrictions effectively limit investments primarily to Chinese startups and will likely change little for American investors planning to work with major Chinese corporations, as these firms derive the majority of their revenues from sectors outside high technology. Thus, the White House's goal may be to prevent new competitors from emerging from China in the field of cutting-edge technologies.

According to an anonymous representative from the Biden administration, the restrictions target the cessation of American capital injections into industries that could benefit the Chinese military or state oversight bodies. This new move from Washington is expected to elicit disapproval from Chinese authorities, as reported by NYT.

In February 2023, Reuters referenced data from the Center for Security and Emerging Technologies (CSET) at Georgetown University, which estimated that during 2015-2021, American investments in AI in China amounted to $40.2 billion, accounting for 37% of the total investments in Chinese AI technologies.

This initiative fits into the broader context of US-China relations, according to researcher Lev Sokolshchik from HSE CKEMI. Under the US National Security Strategy for 2022, China is identified as a strategic competitor, implying a push for containment in all key economic sectors, including AI and advanced chip development. In this context, the rhetoric surrounding national security concerning high-tech restrictions against China merely reiterates standard formulations, according to the expert.

Leonid Kovachich, a sinologist, mentioned that it is inaccurate to portray the White House's new executive order as a direct strike against the Chinese tech sector, as startups are likely to suffer the most rather than established Chinese technology firms. He suggested that under the influence of the American tech lobby, which is disinterested in halting investment cooperation with China, the text of the order has been repeatedly steered towards the mitigation of restrictions.

The new executive order will undoubtedly create certain inconveniences for Chinese companies reliant on American venture capital, Kovachich noted. Presently, Chinese firms lack the technologies necessary for producing the most advanced chips required for developing AI models comparable to ChatGPT, primarily due to a deficit of computational power.

China today focuses on the production of older generations of semiconductors utilized in automobiles and consumer electronics, thereby capturing market shares that were previously fragmented among various manufacturers. Future responses from Beijing are likely to explore measures of an economic nature, according to Kovachich, which may include further restrictions on the supply of key components, such as the export of rare metals.

China has emerged as one of the world's leading technological players by actively attracting foreign capital, including from the US, to develop its AI and technical equipment sectors, according to Konstantin Kotik, head of the NLP R&D team at Just AI. While China is working aggressively towards achieving technological autonomy in AI, it remains reliant on external funding.

From the perspective of American policy norms, the new 'soft' sanctions serve not as instruments of economic pressure but as signals, suggests Alexander Sivolobov, deputy head of the NTI's competence center.