China sharply rebuked President Joe Biden’s long-awaited executive order that limits U.S. investment in technology — but stopped short of issuing immediate counter measures.
The Chinese Commerce and Foreign Affairs ministries issued strong responses on Thursday, just hours after Biden signed off on the measure targeting “countries of concern” on the basis of national security.
“China is strongly dissatisfied with and resolutely opposed to the U.S.’s insistence on introducing restrictions on investment in China,” the Foreign Affairs Ministry said in a statement, according to a CNBC translation. “This is blatant economic coercion and technological bullying.”
The Chinese Embassy in Washington called the move by the Biden administration another attempt to “politicize and weaponize trade” between the world’s two largest economies.
“The latest investment restrictions will seriously undermine the interests of Chinese and American companies and investors, hinder the normal business cooperation between the two countries and lower the confidence of the international community in the U.S. business environment,” wrote Liu Pengyu, spokesman of the Chinese Embassy in Washington, in a statement to CNBC.
He added that Beijing will closely follow the situation and called on Biden to stop attempting to “halt China’s economic development or contain China.”
The Chinese Commerce Ministry called upon the U.S. to “respect the market economy and the principles of fair competition” and to “refrain from artificially hindering global trade and creating obstacles that impede the recovery in the global economy.”
“The message is quite clear,” Eswar Prasad, a professor in international trade at Cornell University, told CNBC on Thursday.
“Washington wants to use the national security imperative as a way of trying to limit the transfers of technology and investments related to technology to China, because there’s not just a national security angle, but also quite frankly, a commercial angle,” he added.
An editorial photo art illustrating smart city communication networks against the urban landscape in Shanghai.
Dong Wenjie | Moment | Getty Images
On Wednesday, Biden signed off on the executive order that limits U.S. investment and expertise in semiconductors and microelectronics, quantum computing, and certain artificial intelligence capabilities in China, Hong Kong and Macao.
The latest order bears some similarities to a toned-down version of the initial Outbound Investment Transparency Act the Senate recently passed and omitted wording for an outright ban on investment.
It comes amid an escalating race for global technological supremacy that has both national security and economic implications.
“I think it is going to have a pretty broad chilling effect on technology transfers and investments by U.S. firms in China,” Prasad said.
Biden warned in the executive order that certain American investments may contribute to “the development of sensitive technologies and products in countries that develop them to counter United States and allied capabilities.”
“I find that countries of concern are engaged in comprehensive, long-term strategies that direct, facilitate, or otherwise support advancements in sensitive technologies and products that are critical to such countries’ military, intelligence, surveillance, or cyber-enabled capabilities,” said the president, who further characterized the situation as “a national emergency.”
“The investment restrictions largely mirror export controls already in place, including those that ban exports to China of machinery and software used to produce advanced semiconductors,” Gabriel Wildau, a Teneo managing director focusing on China political risk, wrote in a note to clients.
“Unprecedentedly tough restrictions that the US Commerce Department issued in October (soon to be expanded) already rendered new U.S. investment in advanced Chinese semiconductor production effectively impossible, since any such factory would need imported equipment covered by those restrictions,” he added.
During a visit to Beijing in July, U.S. Treasury Secretary Janet Yellen assured her Chinese counterparts that any curbs on U.S. outbound investments would be “transparent” and “very narrowly targeted.”
Biden’s executive order though is still some way from becoming concrete legislation.
The U.S. Treasury has been tasked to formulate exact regulations to implement the order, including defining the boundary between prohibited transactions and those that merely require notification.
Late Wednesday, the U.S. Treasury Department invited public comment to “seek early stakeholder participation in the rulemaking process” — including input on the subsets of national security technologies and related products to the areas of technology identified in Biden’s executive order.
The Treasury Department said it anticipates excepting certain transactions, including potentially those in publicly traded instruments and intracompany transfers from U.S. parents to subsidiaries.
‘Spectacularly bad timing’
Biden’s executive order comes at a time when a raft of economic data has underscored slowing growth momentum in the world’s second-largest economy.
Official data Wednesday showed that China’s consumer prices fell for the first time in two years in July from a year ago, as producer prices declined on a year-on-year basis for a 10th straight month.
“I don’t think the U.S. Treasury or the [Biden] administration planned it this way, but this is spectacularly bad timing for China,” Prasad said. “Confidence is falling, growth is stalling, China seems to be sliding into a downward spiral with deflation, low growth and lack of confidence all feeding on each other.”
“This does very little to inspire confidence that China is going to be able to pull back on short-term growth. And this could also affect its long-term growth potential because China is very eager to move into high tech, higher value-added industries,” Prasad said.
As part of its plan to bolster growth, China’s top leaders have recently changed their tone on private and foreign investors, while anticipating the country’s post-Covid pandemic economic recovery to proceed in a “tortuous” manner.
“At the moment, its domestic innovation program is not going that well. China still needs foreign technology — it needs foreign capital a lot less than foreign technology. Without foreign technology, I think it’s very difficult for China to make that leap,” he added.
— CNBC’s Evelyn Cheng contributed to this story and Amanda Macias contributed to this story from Washington.