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Biden’s Executive Order Restriction on Investing in Chinese Technology

US pushback against China in semiconductor race (Source: Global Business Outlook)

A new era for US IT investors has begun with the latest executive order issued by the Biden administration, which restricts private equity and venture capital investments in Chinese technology.

The Biden administration’s new executive order restricting US investment in China’s semiconductors, quantum computing and artificial intelligence sectors underscore the escalating tensions between Beijing and Washington. (Source: Shutterstock)

Biden’s Executive Order Restriction, Growing Rivalry Between US and China

This historic decision emphasizes the growing intra-Pacific rivalry and reaffirms the idea that the second-largest economy in the world is no longer open to these investors. Concerns over China’s progress in these fields potentially compromising US national security interests led to the directive, which is particularly intended to limit investments in industries including semiconductors, quantum computing, and artificial intelligence. The upcoming year will see the implementation of this important policy change.

Due to a confluence of economic hardships and geopolitical concerns, US investors have already started to progressively withdraw from China, changing the investment environment. The combined US private equity and venture investments in China reached an eight-year low in 2022 in terms of capital deployed, according to statistics from PitchBook, and this trend has continued into the first half of the current year.

Although AI, computer processors, and quantum computing are specifically included in the executive order, many investors and experts feel that if the ban’s scope expands, any participation in Chinese technology will become too risky to pursue. “It’s likely to deter investments in those sectors, even beyond what is explicitly prohibited,” warned Adam Hickey, a former deputy assistant attorney general for the Justice Department’s national security division and current partner at the law firm Mayer Brown. “Most investors want to avoid being seen as acting against US national security interests,” he added.

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Biden’s Administration Less Concentration on Investing to China Technologies

But it’s important to remember that this US government approach toward China carries risks. A huge reservoir of investment capital exists outside of China that may fill the gap and potentially yield sizable profits. Another problem is the ongoing challenge of managing present investments.

Think about the situation of the significant US venture capital firms that have funded ByteDance, the parent business of TikTok. ByteDance has been plagued by the possibility of a US ban or a forced sale to fund operations. Profit maximization is important to investors, especially if ByteDance goes public. But the alleged decision by the business to postpone a 2021 US listing because of security worries makes things more difficult. China tightened restrictions on domestic companies dealing in US exchanges that same year. The realization of profits for ByteDance investors is still uncertain since the IT IPO market is still mainly constrained and because US-China tensions are rising.

Other investors express concern that if relationships between the two nations strengthen, US businesses may find it difficult to obtain advantageous transactions. In such a situation, reestablishing confidence will likely be quite difficult. According to Sarracino, “If you already had a presence there, you will have an advantage when things open up. But that’s not the case for firms that weren’t in China or those that scaled back their operations in the country.”

An important shift in the market environment is being signaled at this turning point, which is highlighted by the Biden administration’s executive order barring tech investments in China. The restrictions, which mainly target industries essential to China’s technical development, are probably going to make US investors less interested in Chinese technology. Investors have been forced to reevaluate their strategy due to the rising cross-Pacific rivalry and concerns about national security, which could change the competitive dynamics in the digital investment scene.

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