On August 9, 2023, US President Biden issued an Executive Order (EO) limiting US investments in China in three technology sectors—semiconductors and microelectronics, certain artificial intelligence systems, and quantum information technologies—in 2024 and beyond. The administration narrowed the scope of the order since it was first conceptualized, choosing not to limit biotechnology and green technology investments. Existing private investments (PI), uncalled committed capital to PI, and publicly traded passive investments in these sectors are expected to be exempted. Longer term, US restrictions could broaden, and China-focused PI fund managers could further restrict access to US LPs out of caution or to ease administrative burden. The decision came as PI deal activity has slowed in recent quarters amid US regulatory uncertainty. Taken together, equity markets shrugged off the order following its announcement.
This EO is the third leg of US policy to limit China’s technological development on national security grounds, following US export controls and action to restrict Chinese investment in US technology companies. The EO focuses on PI and corporate foreign direct investments (including M&A, joint ventures, and greenfield investments) made by “US persons/entities,” prohibiting certain investments in these technologies and products and requiring disclosure in some cases. The EO tasks the US Treasury with clarifying and further defining the program. The Treasury issued an accompanying Advance Notice of Proposed Rulemaking that gives an initial indication of their thinking while inviting public comment for a 45-day period. However, one risk is that Congress acts to further tighten constraints. For example, in late July, the US Senate overwhelmingly passed a bill that would require broader reporting that includes investment in public companies.
With the Treasury’s rulemaking, investors will gain clarity around the program, including the exact areas within each technology segment that will be subject to restrictions, as well as any potential exemptions. For instance, while US-based GPs and US citizens running PI funds based in any jurisdiction are subject to the order, it is not clear if US LPs are subject. It is also unclear how PI managers will react. Some have already been diversifying their LP bases away from US investors and/or quietly redomiciling portfolio companies outside of China. There may also need to be leadership changes at firms currently run by US citizens. Investors committing fresh capital to China, particularly in venture capital where such exposures are more common, should consider that the investment opportunity set may be limited or less profitable if the United States is successful in holding back technological developments.
Celia Dallas, Chief Investment Strategist
Aaron Costello, Regional Head for Asia
Vivian Gan, Associate Investment Director, Capital Markets Research