A worker produces semiconductor products for export to Europe and the United States on a production line of a semiconductor manufacturer in Binzhou, east China's Shandong province, April 1, 2024.
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The United States on Friday issued draft rules banning or requiring notification of certain investments in artificial intelligence and other technology sectors in China that could threaten U.S. national security.
The United States Department of the Treasury published the proposed rules and a series of exceptions following an initial comment period following an executive order signed by President Joe Biden last August. The rules put the onus on U.S. individuals and companies to determine which transactions will be restricted or prohibited.
Biden's executive order, which regulated certain U.S. investments in semiconductors and microelectronics, quantum computers and artificial intelligence, is part of a broader effort to prevent U.S. know-how from helping the Chinese develop advanced technology and dominate global markets. dominate.
The US is on track to implement regulations by the end of the year, as expected. Public comments on the proposed rules will be accepted until August 4.
“This proposed rule advances our national security by preventing the many benefits that certain U.S. investments provide – beyond just capital – from supporting the development of sensitive technologies in countries that could use them to threaten our national security,” said Assistant Secretary of Finance for Investment Security Paul. Rosen.
The Treasury Department said the new rules were intended to implement “a limited and targeted national security program” aimed at certain outbound investments in countries of concern.
The Ministry of Finance had mapped out the contours of the proposed rules in August. The Treasury Department included additional exceptions on Friday, such as for transactions deemed to be in the U.S. national interest.
The proposed rules would prohibit transactions in AI for certain end-use applications that involve systems trained to use a certain amount of computing power, but would also require notification of transactions related to the development of AI systems or semiconductors that are otherwise not being forbidden.
Focus on China, Macau and Hong Kong
Other exceptions would apply to publicly traded securities, such as index funds or mutual funds; certain investments in limited partnerships; purchasing property from a country of concern; transactions between a U.S. parent company and a majority-controlled subsidiary; binding commitments that predate the order; and certain syndicated debt financings.
Certain transactions with third countries that have been identified as addressing national security concerns, or where the third country adequately addresses national security concerns, could also be exempt, the Treasury Department said.
The order initially targets China, Macau and Hong Kong, but U.S. officials have said it could be expanded later.
Former Treasury Department official Laura Black, an attorney at Akin Gump in Washington, said the Treasury Department is trying to define the rule's scope as narrowly as possible, but that would require more vigilance from companies looking to invest in China.
“US investors will need to conduct more extensive due diligence when making investments in China or investments involving Chinese companies operating in the relevant industries,” she said.
Black said the Treasury Department's proposed rules put U.S.-managed private equity and venture capital funds in its crosshairs, as well as some U.S. limited partners' investments in foreign managed funds and convertible debt.
Certain Chinese subsidiaries and parent companies will be subject to the rule, which would also ban certain investments by U.S. companies in third countries, she added.
In addition to equity investments, joint ventures and greenfield projects, standard debt can also be accommodated when it becomes equity.
The regulations include restrictions on the export of certain technology to China, such as restrictions on the shipment of certain advanced semiconductors.
The aim is to prevent US funds from helping China develop its own capabilities in those areas to modernize its military.
Those who violate the rules may be subject to both criminal and civil penalties, and investments may be liquidated.
The Treasury Department said it had spoken with U.S. allies and partners about the objectives of the investment restrictions, noting that the European Commission and the United Kingdom had begun to consider whether and how to address outward investment risks.
