In a move aimed at protecting national security, the United States has issued new draft rules for investments in China’s AI and tech sectors. These rules, published by the U.S. Treasury Department, will require U.S. individuals and companies to determine which transactions in China’s AI and tech sectors could pose a threat to U.S. national security. The rules come after an executive order signed by President Joe Biden in August 2023, which directed the regulation of certain U.S. investments in semiconductors, microelectronics, quantum computing, and artificial intelligence.
Treasury Assistant Secretary for Investment Security, Paul Rosen, explained that the proposed rules aim to prevent the support of sensitive technologies in countries that could use them to threaten U.S. national security. These rules are part of a broader push to prevent the transfer of U.S. know-how that could help China develop sophisticated technology and dominate global markets.
The proposed rules focus primarily on China, Macau, and Hong Kong but could be expanded to other countries in the future. Laura Black, a lawyer at Akin Gump in Washington and former Treasury official, noted that these rules will require increased vigilance from U.S. investors looking to invest in China or Chinese companies operating in the covered sectors. U.S. investors will need to engage in more extensive due diligence to ensure compliance with the rules.
The rules include various exceptions, such as transactions deemed to be in the U.S. national interest and certain third-country transactions addressing national security concerns. However, they would ban transactions in AI for certain end uses and systems trained using a specified quantity of computing power. Transactions related to the development of AI systems or semiconductors that are not otherwise prohibited would require notification.
These rules also target U.S.-managed private equity and venture capital funds, as well as some U.S. limited partners' investments in foreign managed funds and convertible debt. Chinese subsidiaries and parents will be covered by the rules, which could also prohibit some investments by U.S. companies in third countries.
The aim of these regulations is to prevent U.S. funds from assisting China in developing its own capabilities in areas such as advanced semiconductors, which could be used to modernize its military. Violators of the rules could face both criminal and civil penalties, and investments could be unwound.
The U.S. is currently accepting public comments on the proposed rules until August 4. If implemented, these regulations would further restrict U.S. investments in China’s AI and tech sectors in the name of national security.
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