[Why&Next] The US Tightens Funding for Advanced Industry Investment in China

President Biden Signs Executive Order on Investment Restrictions
Concerns Over Connections to Chinese Military Sector... "From a National Security Perspective"
China Strongly Opposes "Abuse of National Security"
Likely to Pressure Allies Including South Korea to Join

The U.S. administration under Joe Biden has blocked the inflow of American capital into China's advanced technology development sectors such as artificial intelligence (AI), semiconductors, and quantum computing. While this move is positioned as a ‘derisking’ measure to protect national security, China immediately protested. As expectations arise that allied countries, including South Korea, will be asked to join these regulations, tensions are rising among neighboring countries ahead of the upcoming South Korea-U.S.-Japan summit on the 18th.

White House Blocks U.S. Capital Inflow into Chinese Technology Development

On the 9th (local time), President Biden signed an executive order regulating investments by American capital such as private equity and venture capital into China’s advanced technology sectors. China, along with the Hong Kong and Macau Special Administrative Regions, is designated as a so-called ‘country of concern,’ and direct investments in Chinese companies whose sales, net profits, investments, or operating expenses in three sectors?AI, advanced semiconductors, and quantum computing?account for more than 50% of their overall business are prohibited or restricted. The administration plans to announce detailed implementation rules after consulting industry opinions.

Under this measure, American capital intending to invest in China must mandatorily report their investment plans in advance. U.S. Treasury Secretary Janet Yellen will decide on investment prohibitions based on these reports. In a letter to Congress, President Biden declared a national emergency regarding military and intelligence-related core technologies, emphasizing that "some American capital investments are exacerbating these risks."

The U.S. move to restrict capital investment in advanced technology following export controls on China is analyzed as an effort to nip China’s technological rise in the bud. It aims to prevent U.S. companies and individuals from serving as the ‘financial lifeline’ for the development of various advanced technologies that could be used in China’s military technology. The three targeted advanced technology sectors are central to the technological hegemony competition between the U.S. and China.

According to research from Georgetown University, U.S. investors made 401 joint or sole investments in Chinese AI companies between 2015 and 2021, totaling $7.45 billion (approximately 9.8 trillion KRW). A senior U.S. administration official explained, "This investment restriction targets a small number of core technologies related to the modernization of China’s military and internal surveillance capabilities," adding that "China has sought to acquire sensitive core technologies for military modernization."

U.S. Likely to Pressure Allies to Join

Since this measure focuses on investment restrictions targeting China, it is expected to have no immediate direct impact on neighboring countries such as South Korea. The South Korean government also views the impact as limited since the scope applies only to U.S. persons or entities. A Ministry of Trade, Industry and Energy official said, "The impact on domestic industries is expected to be limited," adding, "The government will closely analyze the effects on our economy and, if necessary, submit opinions from the government or industry to the U.S. government based on the analysis."

However, the Biden administration is strongly urging allied countries to participate in its efforts to counter China. Accordingly, there is a possibility of pressure on allies, including South Korea, to join in some form. The Wall Street Journal (WSJ) reported, "The U.S. is pressuring European and Asian allies to adopt similar measures restricting investments in China." A representative example is the consensus reached among G7 leaders at the May summit in Hiroshima on the importance of protecting sensitive technologies linked to national security. However, responses vary among countries. Japan reportedly has no intention of amending laws related to its citizens’ and companies’ investments in China.

"Very Disappointed" China May Retaliate... Industry Watches Closely

China immediately protested against the new regulations. Liu Fengyu, spokesperson for the Chinese Embassy in the U.S., stated, "We are very disappointed," and added, "China opposes the U.S. politicizing and weaponizing trade, science, and technology, and abusing national security to deliberately disrupt normal economic exchanges."

Although the Biden administration emphasized that the regulation is based on national security rather than economic reasons, forecasts suggest an inevitable cooling of relations between the two countries, which have resumed high-level meetings. In particular, further retaliatory measures from China are expected. The New York Times (NYT) reported, "While the Biden administration stresses that this measure is a tailored action to protect national security, China will view it as part of a broader policy to suppress its rise," adding, "Export controls have already triggered Chinese retaliation." This foreshadows additional Chinese retaliation soon, similar to previous export restrictions on Micron, gallium, and germanium.

The industry is closely monitoring the developments in the U.S.-China conflict. The National Venture Capital Association stated, "We will watch carefully to avoid unintended consequences." The Semiconductor Industry Association (SIA) said in a statement, "The semiconductor industry agrees on the necessity of ensuring national security," and added, "We hope the final rule will allow U.S. semiconductor companies to compete on a level playing field and access major global markets, including China." Since the regulation targets U.S. capital rather than U.S. semiconductor companies, the industry is taking a wait-and-see approach. This tone differs from a previous statement recommending restraint on additional semiconductor export controls to China.

Meanwhile, some question the effectiveness of the regulation, noting that the U.S. narrowed the scope of the regulation more than initially expected. Initially, biotechnology and energy sectors were also expected to be included. Andrew Collier, Managing Director of Orient Capital Research, said, "Western investors may be disappointed to lose opportunities to invest in advanced technology in China," but predicted, "There is so much Western capital chasing these opportunities that China will not be significantly harmed." According to the Peterson Institute for International Economics, the U.S. accounted for less than 5% of China’s inbound direct investment in 2021 and 2022. Michael McCaul, Chairman of the U.S. House Foreign Affairs Committee, argued, "This is a time when more aggressive measures are needed than ever," and claimed, "The administration continues a trend of sacrificing national security to appease industry."

This content was produced with the assistance of AI translation services.