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Understanding the Implications of Biden's Executive Order on U.S. Investments in Chinese Companies
The Executive Order and Its Potential Impact
The Biden administration recently released a long-anticipated executive order on U.S. investments in Chinese companies, leaving many questions about its implementation. This executive order, which is currently open for a 45-day public comment period, provides U.S. investors with a significant opportunity to influence the final regulation.
According to Brian P. Curran, a partner in global regulatory at the law firm Hogan Lovells in Washington, D.C., the executive order provides an outline of the program's scope, but it is not yet a proposed or final rule. President Joe Biden signed the order with the aim of restricting U.S. investments into Chinese semiconductor, quantum computing, and artificial intelligence companies due to national security concerns.
Role of the Treasury Department
Treasury Secretary Janet Yellen is primarily responsible for determining the details of the executive order. Her department has published a fact sheet and a lengthy "Advance Notice of Proposed Rulemaking" with specific questions for which it seeks more information. Businesses can share information confidentially as needed, and this advanced notice is only a means for sharing the Treasury's initial considerations. It will be followed by draft regulations.
Winston Ma, an adjunct professor at NYU Law and a former managing director of CIC, stated that the final scope of the restriction, to be defined by the Treasury Department after public consultations, will be critical for enforcing the order. The recent announcements do not explicitly prohibit U.S. investments into Chinese businesses, but the documents indicate what policymakers are focused on.
Transactions Potentially Covered by the Order
The U.S. transactions potentially covered by the forthcoming regulations include the acquisition of equity interests such as via mergers and acquisitions, private equity, and venture capital; greenfield investment; joint ventures; and certain debt financing transactions. The Treasury Department has stated that the regulations will not take effect retroactively, but it may request information about transactions completed or agreed to since the issuance of the executive order.
Sectors of Concern and Exclusions
The sectors of concern under the executive order include semiconductors, quantum computing, and artificial intelligence. The Treasury Department is considering a ban on tech that enables the production or improvement of advanced integrated circuits, the design, fabrication, and packaging capabilities for advanced integrated circuits, and the installation or sale to third-party customers of certain supercomputers. It is also considering a notification requirement for transactions involving the design, fabrication, and packaging of other integrated circuits.
Public Comments and Future Regulations
The Treasury Department is asking for written comments on its advanced notice by September 28. The notice includes wide-ranging requests for data into investment trends. It also asked questions about effective threshold requirements and definitions, and details about the resulting burdens for U.S. investors. The department is also asking for areas within the three overarching categories where U.S. investments into Chinese entities would "provide a strategic benefit to the United States, such that continuing such investment would benefit, and not impair, U.S. national security."
Impact on China-based Venture Capitalists
Given the lengthy process, forthcoming regulations aren't expected to take effect until next year. However, the niche industry of China-based venture capitalists, which raise funds from U.S. investors to invest in Chinese start-ups, many tech-focused, is already struggling. Fewer than 300 unique U.S.-based investors have participated in China-based VC deals since 2016 each year, with just 64 participants so far this year, according to Pitchbook.
The industry and political developments mark a shift in the overall risk environment. Jonathan Levy, a University of Chicago economic history professor and author of "Ages of American Capitalism: A History of the United States," stated that the kind of law that Biden's planning is small but important because once the state starts to meddle with these things it creates more dramatic possibilities. The latest developments signal that the U.S. government doesn't want the new economic relationship with China to consist of U.S. investment funds investing in Chinese high tech because high tech is seen as a strategic interest.
Implications for New Businesses: A "Hot Take"
The Biden administration's executive order on U.S. investments in Chinese companies could have significant implications for new businesses, particularly those operating in the technology sector. This includes businesses involved in semiconductors, quantum computing, and artificial intelligence, which are the main sectors of concern under the executive order.
Opportunities and Challenges
While the executive order presents challenges, it also opens up opportunities. The public comment period allows businesses to influence the final regulation, potentially shaping it in a way that minimally impacts their operations. However, businesses will need to closely monitor the situation and actively participate in the consultation process to take advantage of this opportunity.
New businesses, especially those planning to invest in Chinese companies or technology, will need to carefully consider their strategies. They will need to assess the risks and potential impacts of the forthcoming regulations on their operations and investment plans.
Adapting to Change
The executive order underscores the importance of adaptability in today's rapidly changing business environment. New businesses will need to be flexible and ready to adjust their strategies and operations in response to regulatory changes. This will be crucial for their survival and success in the long run.
In conclusion, while the executive order presents challenges, it also provides new businesses with the opportunity to influence the final regulation and adapt their strategies accordingly. This will be crucial for navigating the changing business environment and ensuring their long-term success.
Article First Published at: https://www.cnbc.com/2023/08/11/what-bidens-executive-order-means-for-us-investors-in-china-.html
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