Biden's upcoming limits on U.S. investments in China expected to target VCs and private equity, not typical portfolios

By Victor Reklaitis

Administration is taking aim at AI, semiconductor chips and quantum computing

President Joe Biden looks set to sign a much-anticipated executive order in the coming weeks that would limit some U.S. investments in certain high-tech sectors in China, in a fresh sign of how Washington is aiming to take a tough stance against Beijing.

The goal of the order would be to address national-security worries posed by U.S. companies' investments in "countries of concern -- in particular China," said 22V Research analysts led by Kim Wallace, a former Obama Treasury official, in a note on Thursday.

The 22V analysts said they expect "outright prohibitions in a few sectors, namely semiconductors (SMH)(SOXX) and likely AI and quantum technology, and monitoring in others through a notification process."

AI stands for artificial intelligence(BOTZ), while the terms quantum technology and quantum computing (QTUM) refer to a growing field that exploits the laws of quantum mechanics to greatly boost processing speed and capacity.

Typical U.S. investments in China (MCHI)(FXI) are not likely to be affected by the upcoming executive order, according to Wallace's team.

"While the details and parameters of the executive order are still not fully clear (and likely not yet fully decided), we continue to strongly believe that it will not include typical portfolio investment in China in its scope. It is targeted mainly at investment by corporates but will likely impact private equity and venture capital investment," the 22V analysts wrote.

"Importantly, it is also intended as something of a pilot program, which means it will evolve and potentially broaden in scope over time."

A Bloomberg report on Thursday said Biden's executive order targeting China looks set to come around the time of a Group of Seven summit May 19-21 in Hiroshima, Japan, as the U.S. wants its G-7 allies to endorse the limits. But a Politico report on Tuesday said Biden's new rules are expected later this month.

Other reporting on the upcoming action has come from the Wall Street Journal, which said last month that U.S. officials want to prevent American investors from providing funding and expertise to Chinese companies that could improve the speed and accuracy of Beijing's military decisions. VC firm Sequoia Capital has already started screening new investments in Chinese semiconductor or quantum-computing companies as it prepares for the new U.S. rules, according to the Journal.

"The U.S. effort has been underway, and under internal debate, for over a year," 22V's team said.

Attorneys at law and lobbying firm Akin Gump said in a note last month that Biden's upcoming order "will be only the first step in regulating outbound investment," as they expect that information collected through a notification program will help determine future actions and that the number of affected technologies is likely to grow over time.

"The administration appears to be still debating whether to cover any forms of passive investment or to cover only investment that includes some form of 'know how' transfer or support," the Akin Gump team said. "Remarks by Commerce Secretary [Gina] Raimondo, however, suggest that the emphasis may be on the latter type of investment, such as non-passive private equity and venture capital investments."

In a similar vein, KraneShares Chief Investment Officer Brendan Ahern said in a blog post on Friday that he views the upcoming curbs as focused on "investments where U.S. individuals and firms take an active role in management, i.e. private equity and venture capital investments."

"I do not believe this plan represents anything unexpected and is a natural progression from the export restrictions implemented last year," wrote Ahern, whose company provides China-focused funds such as the KraneShares CSI China Internet ETF (KWEB).

Both Democrats and Republicans in Washington, D.C., continue to appear eager to take a firm stand against Beijing. Signs of that came last month when video-sharing app TikTok faced a grilling at a Capitol Hill hearing, as well as in January when the narrowly divided House of Representatives voted overwhelmingly in favor of setting up a new Select Committee on the Chinese Communist Party.

Members of that House committee met earlier this month with several big U.S. companies -- including Alphabet (GOOGL)(GOOGL), Apple (AAPL), Microsoft (MSFT) and Palantir (PLTR) -- to talk about China's growing influence on their industries.

U.S. lawmakers also have been highlighting security concerns over the technology in cargo cranes made by Shanghai Zhenhua Heavy Industry Co. , known as ZPMC.

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-Victor Reklaitis

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04-22-23 1205ET

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