US investors want clarity on Biden's vague curbs on China tech
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[September 27, 2023] By
Pete Schroeder, Michelle Price and Carolina Mandl
WASHINGTON/NEW YORK (Reuters) - U.S. financial firms are pushing for
greater clarity on proposed new rules curbing U.S. investments in some
China technology sectors which they say are too vague and put the onus
of compliance on investors.
Aiming to protect national security and prevent U.S. capital from aiding
China's military, President Joe Biden issued an executive order last
month restricting new U.S. investments in sensitive Chinese
technologies. The Treasury Department subsequently kicked off a
rule-making process to implement the order, and financial firms have
been rushing to meet a Sept. 28 to provide input. The rules are expected
to be implemented sometime next year.
The proposed rule applies to U.S. persons - including U.S. citizens,
residents, businesses and U.S. units of overseas businesses. They must
notify the Treasury when making certain investments in China in the
semiconductors and microelectronics, artificial intelligence and quantum
information technologies sectors, and bans other such investments
altogether.
In addition to venture capital and private equity firms, hedge funds,
banks and potentially funds that track indexes are likely to be affected
by the proposal, which financial industry executives and lawyers
complain is broad and ambiguous.
Among their key concerns: how the rules would apply to U.S. persons;
which specific Chinese entities would be subject to the restrictions;
and better defining a proposed exemption for publicly traded securities.
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"The scope is pretty broad," said Timothy Keeler, a partner at law firm
Mayer Brown, noting it applies to Chinese entities operating beyond
China. "It could apply to companies that are outside of China but are
subsidiaries of Chinese companies or controlled by a Chinese person."
While the U.S. already has restrictions on some Chinese investments in
the U.S. and U.S. investments in China, the order creates a new program.
Unlike a process conducted by the Committee on Foreign Investment in the
United States, a panel comprising U.S. government agencies, the new
program will not involve case-by-case reviews of investments. And in
contrast to sanctions, it does not envisage a list of restricted
entities or companies.
That means investors have to figure out which investments come under the
scope of the new rule and how to comply, creating significant compliance
costs and legal risks.
"That puts a fair amount of burden on an investor," said a former
Treasury official.
They may also bar U.S. persons from "knowingly directing" covered
transactions by non-U.S. persons. But the threshold for knowledge, or
what directing means, is unclear.
"We are hearing a lot about the issue of a U.S. person directing the
activities of a non-U.S. person," said Jen Fernandez, a partner at law
firm Sidley Austin.
"At what level does 'directing' kick in and what does that mean for
these non-U.S. private equity funds that may have a dual national
sitting as a partner?"
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A Chinese flag is displayed next to a "Made in China" sign seen on a
printed circuit board with semiconductor chips, in this illustration
picture taken February 17, 2023. REUTERS/Florence
Lo/Illustration/File Photo
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The program proposes exempting publicly traded securities and index
and mutual funds, but financial firms want those securities to be
more tightly defined. One key question is whether shares in initial
public offerings allocated prior to trading would be carved out.
To address these and other issues, some firms plan to push for a
list of restricted entities and investments, similar to a sanctions
regime. Former Securities and Exchange Commission chair Jay Clayton,
now an adviser with law firm Sullivan & Cromwell, voiced this idea
when he told a House of Representatives committee on China this
month that "Wall Street responds very quickly" to lists of barred
entities.
Some sources, though, said they doubted the Treasury would go that
route, which would reduce the program's flexibility and, since the
target is cutting-edge technology, quickly become outdated. "That
just doesn't appear to be where this process is heading," said
Keeler.
DE-RISKING
A Treasury spokesperson did not respond to a request for comment but
said in the proposal that it welcomes input. The rules are necessary
because U.S. investments can be exploited to accelerate the
development of sensitive technologies that threaten U.S. national
security, the Treasury and administration has said.
Financial firms say they support the administration's national
security goals but worry about increased liability and the economic
costs of restricting capital flows. U.S.-China tensions have already
seen acquisitions of Chinese companies by U.S. firms sink almost 60%
from January this year through early August compared with the same
period last year.
"Protecting U.S. national security is a paramount obligation of the
federal government, but as the Treasury states, maintaining global
capital flows need not be inconsistent with that," said Peter
Matheson, a managing director at the Securities Industry and
Financial Markets Association, a financial industry lobby group.
Lobbying to contain the rules, however, is politically sensitive,
especially because China hawks in Congress are pushing bills to make
the restrictions tougher. Given the uncertainty, companies may start
avoiding the covered sectors altogether, said Fernandez.
"I do think we’re going to see a lot of de-risking," she added.
(Reporting by Pete Schroeder and Carol Mandl; Writing and reporting
by Michelle Price; Editing by Deepa Babington)
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