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New U.S. Rules on China Investments Fail to Offer Clear Guidance

Money managers, lobbyists and members of Congress had hoped U.S. President Joe Biden’s long-awaited restrictions on investment in China would make clear what was allowed and what was out of bounds.

Instead, they got more questions than answers.

“There’s a lot left to be worked out,” said Jeremy Zucker, head of the national security practice at law firm Dechert LLP. “It’s not clear where the government will draw the line between what’s prohibited and what will merely require notification. That will result in a certain amount of agony in the interim.”

The order, released Wednesday, has been two years in the making as the administration sought to balance demands from China hawks focused on national security and the investment community seeking to avoid disruption.

The White House wants to create a regime that will restrict U.S. investments in semiconductors, quantum computing and artificial intelligence — particularly with military applications — without risking the broader economic relationship.

But the Treasury Department’s 46-page “advanced notice of proposed rule-making” released alongside the order — a rough road map for the order’s rules — includes at least 80 separate questions about how it should ultimately structure the program, which firms have 45 days to comment on. The rules likely won’t be final until next year, just months before a presidential election that could upend them anew if Donald Trump gets re-elected.

Requests for input range from the open-ended to the specific, and ask for help identifying unintended consequences of the proposed rules at least five times, underscoring how sensitive the debate around the new regulations has become.

“They’re clearly reaching out to try to solicit views from a wide range of stakeholders,” said Anne Salladin at law firm Hogan Lovells.

Companies will now likely go into “lobbying overdrive” to try to shape the rules, said Emily Kilcrease, a senior fellow at the Center for a New American Security.

Rep. Mike Gallagher, the Wisconsin Republican who chairs the House committee focused on competition with China, described the proposed rules as having loopholes “wide enough to sail the PLA Navy fleet through,” using the abbreviation for China’s People’s Liberation Army.

Congress has taken some action on the outbound investment issue, attaching an amendment to the Senate version of the must-pass defense bill that would require firms to notify the government of their investments in certain sectors of the Chinese economy.

That bill, sponsored by Sen. Bob Casey, a Pennsylvania Democrat, and Sen. John Cornyn, a Texas Republican, doesn’t include a ban on investments or a provision on passive investments. But that could change as the two chambers bring their versions of the defense bill into alignment.

Gallagher said Congress needs to also address the “passive flows of U.S. money” into Chinese companies, an apparent reference to the kinds of index and mutual funds that are likely to be excluded from the order.

The order “explicitly provides for a future broadening to other sectors,” said Phil Ludvigson, a partner at King and Spalding and a former Treasury official. “Given the interest on Capitol Hill in doing just that, it’s a pretty good bet that the scope of the program will be much broader and more complex five years from now.”

Even after the rules are finalized, participation by allies and partners will be key.

“Now that the president has set out a broad framework for the program, it will be crucial to follow that up with coordination among our allies,” Ludvigson said. “If it ends up that the U.S. is the only country to put these kinds of capital controls into place, the program won’t have the desired effect and could even backfire by disadvantaging U.S. companies.”

Source: The Japan Times