Key Takeaways:

• Outbound investment rules may require notification, but there is less risk of being blocked by regulators.

• Investments in advanced semiconductors in China may still be subject to being blocked.

• The required notification, review, and possible restriction still represents a massive increase (from almost nothing) in regulation on outbound investments.

• Increases in the scope and powers of the reviewers may follow in future regulations or legislation.

The Moving Target

We have been writing since last July about the proposed outbound investment measures that would review and possibly deny proposed outbound investments from the United States to China. Rumors swirled that the rules would be released by the end of 2022, have broad coverage, and give regulators the authority to block a wide range of investments. But the regulatory landscape in this new territory seems full of shifting sands.

Oversight, but Less Restriction . . .

Recent reports indicate that an executive order on outbound investments may have a lighter touch than the anticipated carte blanche for regulators to stop investments in quantum computing, AI, renewables, and biotech wherever they saw an investment as a threat to national security. It appears that the Executive Order, expected as soon as this month, will carry notification requirements for U.S. high-tech investments in China, but that the Order may limit the authority to prohibit transactions to investments in the semiconductor industry—the field of play in which much of the recent struggle for technological advantage has played out in the past five years.

. . . but Still a LOT of New Oversight!

Nevertheless, the review of outbound investments represents a brave new world of government oversight. For decades, U.S. companies have been free to pour money into development in China, where less expensive labor and a more lax regulatory environment drew U.S. manufacturing throughout the 80s, 90s, and 2000s. Within the bounds of U.S. export controls on technology (which are also tightening of late), U.S. firms were free to invest in PRC companies or in their own facilities in China.

Now, for the first time, the U.S. government will have information on, and at least some capacity to scrutinize, capital moving from the United States to China. That represents an entirely new regulatory requirement, and possibly a restriction, on private equity and strategic investors in China. New rules may mean new headaches for some, but they often mean new opportunities for others, so the details of the upcoming outbound investment rules remain highly anticipated among investors.

Is this Détente? 

It is probably too optimistic to ascribe to this move any sort of movement back toward comfortable relations with China. But, in the current environment, even a slowing of the constant ratchet of tensions upward, feels a little détente-y.^[1] So much so that the Whitehouse already objected to the characterization of the new outbound investment order as something less than a strong step to protecting U.S. National Security. The Biden administration is likely (and reasonably) concerned that China hawks will take the position that the new regulation does not go far enough to keep China from advancing toward technological dominance. 

This is not a blog on politics, but a(n admittedly layperson’s) analysis of the political interplay indicates that this Executive Order may be only the first step of an iterative, increasing oversight of outbound investment in China. 

More to Come

Questions remain as of the nature, scope, jurisdiction, and force of the rules. What limitations will there be on regulators’ power to restrict or prohibit investments? Will Hong Kong be subject to the same restrictions? (Probably so, as it is now treated as part of China for the purposes of U.S. export regulations). How will the controls effect non-U.S. companies with a presence in the United States and China? Will non-U.S. companies need to, or be able to, use non-U.S. funds for investments?

We will continue to monitor the developments in this story and report here as we learn more information.

FOOTNOTES

^[1] That sound you hear is the wailing and gnashing of teeth of the folks who worked so hard to teach me International Relations. Apologies to Professors Clemmons and Tierney!