As the clock ticks towards the September 28 deadline for input on new U.S. regulations concerning investments in certain Chinese technology sectors, financial firms are sounding the alarm. The rules, set to be implemented next year, aim to prevent U.S. capital from bolstering China’s military and sensitive tech sectors like semiconductors, AI, and quantum technologies. However, industry experts are calling for more clarity as they navigate a sea of uncertainty.
The lack of clarity may hamper U.S.-China economic activities even further, experts say
President Joe Biden issued an executive order last month to tighten control over such investments, transferring the responsibility of compliance mainly to investors. “It puts a fair amount of burden on an investor,” noted a former Treasury official. Unlike earlier systems which involved case-by-case reviews, the new regulations demand that investors figure out the applicable investments themselves, leading to concerns about rising compliance costs and legal risks.
The proposed rule is affecting not just venture capital and private equity firms but could also extend to banks, hedge funds, and even index-tracking funds. Timothy Keeler, a partner at law firm Mayer Brown, highlighted, “It could apply to companies that are outside of China but are subsidiaries of Chinese companies or controlled by a Chinese person.”
Moreover, the vague language in the proposal is raising eyebrows. Financial industry executives question how the rules would apply to “U.S. persons,” the specific Chinese entities in focus, and the nature of exemptions for publicly traded securities. “At what level does ‘directing’ kick in?” questioned Jen Fernandez, a partner at law firm Sidley Austin, illustrating the level of ambiguity clouding the directives.
As the financial sector grapples with these issues, there’s also a broader concern that the lack of clarity may stymie U.S.-China economic activities even further. U.S. acquisitions of Chinese companies have already dipped by nearly 60% this year compared to the same period last year.
While firms agree on the need to protect U.S. national security, they fear that the uncertainty surrounding the rules may inadvertently lead to “de-risking,” or avoiding investments in covered sectors altogether. Amidst political sensitivities and economic ramifications, the clamor for a clearer rulebook is growing louder as the input deadline nears.
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