Biden Orders Ban on U.S. Investments in China’s Sensitive High-Tech Industries

President Biden escalated his confrontation with China on Wednesday by signing an executive order banning American investments in key technology industries that could be used to enhance Beijing’s military capabilities, the latest in a series of moves putting further distance between the world’s two largest economies.

The order will prohibit venture capital and private equity firms from pumping money into Chinese efforts to develop semiconductors and other microelectronics, quantum computers and certain artificial intelligence applications. Administration officials stressed that the move was tailored to guard national security, but China is likely to see it as part of a wider campaign to contain its rise.

“The Biden administration is committed to keeping America safe and defending America’s national security through appropriately protecting technologies that are critical to the next generation of military innovation,” the Treasury Department said in a statement. The statement emphasized that the executive order was a “narrowly targeted action” complementing existing export controls and that the administration maintained its “longstanding commitment to open investment.”

Narrow or not, the new order comes at perhaps the most fraught moment in the U.S.-China relationship since President Richard M. Nixon and Secretary of State Henry Kissinger opened a dialogue with Beijing in the early 1970s. A series of expanding export controls on key technologies to China has already triggered retaliation from Beijing, which recently announced the cutoff of metals like gallium that are critical for the Pentagon’s own supply chain.

Mr. Biden has stressed that he wants to stabilize relations with China following a Cold War-style standoff over a spy balloon shot down after crossing through American airspace and the discovery of a broad Chinese effort to put malware into power grids and communications systems. He has sent Secretary of State Antony J. Blinken, Treasury Secretary Janet L. Yellen and other officials to reopen communications in recent months. Gina Raimondo, the commerce secretary, is expected to go to China in coming weeks.

Administration officials have argued that they have been acting with a prudence that should have been exercised around key technologies years ago.

But Wednesday’s announcement takes that effort to a new level. While export bans and concerns about Chinese investment in the United States have a long history, the United States has never before attempted broad limits on the flow of investment into China.

In fact, for much of the past few decades, the United States has encouraged American investors to deepen their ties in the Chinese economy, viewing that as a way to expand the web of interdependencies between the two countries that would gradually integrate Beijing into the Western economy and force it to play by Western rules.

Reviews over the past few years, however, concluded that investments in new technologies and joint ventures were fueling China’s military and its intelligence-collection capabilities, even if indirectly. American officials have been actively sharing intelligence reports with allies to make the case that Western investment is key to China’s military modernization plans — especially in space, cyberspace and the kind of computer power that would be needed to break Western encryption of critical communications.

Mr. Biden’s delegation discussed joint efforts to limit high-tech investment with its counterparts at the recent Group of 7 summit meeting in Hiroshima, Japan. Several allies, including Britain and the European Union, have publicly indicated that they may follow suit. The outreach to other powers underscores that a U.S. ban may not be that effective by itself and would work only in conjunction with other major nations, including Japan and South Korea.

The executive order coincides with a bipartisan effort in Congress to impose similar limits. An amendment along those lines by Senators Bob Casey, Democrat of Pennsylvania, and John Cornyn, Republican of Texas, was added to the Senate version of the annual defense authorization bill. Administration officials said they would try to align their upcoming rules with the congressional framework.

Industry officials responded cautiously to the new order.

“We hope the final rules allow U.S. chip firms to compete on a level playing field and access key global markets, including China, to promote the long-term strength of the U.S. semiconductor industry and our ability to out-innovate global competitors,” the Semiconductor Industry Association said in a statement.

Gabriel Wildau, a managing director at the consulting firm Teneo who focuses on political risk in China, said the direct effect of the executive order would be modest, given its limited scope, but that disclosure requirements embedded in the order could have a chilling effect.

“Politicians increasingly regard corporate investments in China as a form of collusion with a foreign enemy, even when there is no allegation of illegality,” he said.

The Treasury Department, which has already consulted with American executives about the forthcoming order, will begin a process of formally taking comments before drafting rules to be put in place next year. But American firms may alter their investment strategies even before the rules take effect, knowing that they are coming.

China’s government is almost certain to criticize Mr. Biden’s order, although the full response might be a little slow in coming. The foreign ministry is not holding its usual daily news conferences in Beijing this week, as many from the Chinese leadership have headed to the country’s Beidaihe beach resort for their usual summer retreat and discussions of policy and personnel.

In March, according to an account published by the official Xinhua news agency, China’s president, Xi Jinping, declared that “Western countries, led by the United States, have implemented all-around containment, encirclement and suppression against us, bringing unprecedented severe challenges to our development.”

China’s own investment restrictions are broader than the new American rules — they apply to all outbound investments, not just those in the United States. And they reflect a technology policy that in some ways is the opposite of the new American restrictions.

China discouraged or halted most low-tech outbound investments, like purchases of real estate or even European soccer clubs. But China allowed and even encouraged further acquisitions of businesses with technologies that could offer geopolitical advantages, including investments in overseas businesses involved in aircraft production, robotics, artificial intelligence and heavy manufacturing.

The latest move from Washington comes at a rare moment of vulnerability for the Chinese economy. Chinese cities and some businesses have declared 2023 a “Year of Investing in China” in hopes of a post-Covid revival of their local economies. But Mr. Xi has created an environment that has made many American venture capital firms and other investors more cautious.

Western companies that assess investment risk, like the Mintz Group, have been investigated and in some cases their offices have been raided. A Japanese executive was accused of espionage, and a new anti-espionage law has raised fears that ordinary business activities would be viewed by China as spying.

The Biden administration’s previous moves to restrain sensitive economic relationships have taken a toll. China’s telecommunications champion, Huawei, has been almost completely blocked from the U.S. market, and American allies, starting with Australia, are ripping Huawei equipment out of their networks. China Telecom was banned by the Federal Communications Commission, which said it “is subject to exploitation, influence and control by the Chinese government.”

At the same time, the United States — with the somewhat reluctant help of the Dutch government, Japan and South Korea — has gone to extraordinary lengths to prevent China from building up its own domestic capability to manufacture the most high-end microelectronics by itself.

Washington has banned the export of the multimillion-dollar lithography equipment used to produce chips in hopes of limiting China’s progress while the United States tries to restore its own semiconductor industry. Taken together, it is an unprecedented effort to slow an adversary’s capabilities while speeding America’s own investment.

Keith Bradsher, Ana Swanson and Sarah Kessler contributed reporting.