Investment uncertainty: U.S. financial sector demands clarity on Chinese tech

With the September 28 deadline looming for input on new U.S. regulations regarding investments in specific Chinese technology sectors, financial institutions are expressing growing concerns. These regulations, slated for implementation next year, aim to prevent U.S. capital from flowing into China's military and sensitive tech areas, such as semiconductors, AI, and quantum technologies. However, industry experts are calling for greater clarity in the face of considerable uncertainty.

Investment uncertainty: U.S. financial sector demands clarity on Chinese tech

Last month, President Joe Biden issued an executive order to tighten control over such investments, placing the responsibility for compliance largely on investors. This shift has placed a significant burden on investors, unlike the earlier system, which involved case-by-case reviews. Under the new regulations, investors are required to determine the relevant investments themselves, leading to worries about rising compliance costs and legal risks.

The impact of the proposed rule extends beyond venture capital and private equity firms, potentially affecting banks, hedge funds, and even index-tracking funds. Timothy Keeler, a partner at the law firm Mayer Brown, pointed out that it could also apply to companies outside of China that are subsidiaries of Chinese firms or under Chinese control.

Furthermore, the vague language in the proposal is generating confusion. Financial industry leaders are questioning how the rules will apply to "U.S. persons," the specific Chinese entities targeted, and the exemptions for publicly traded securities. This lack of clarity is clouding the directives and leaving important questions unanswered.

As the financial sector grapples with these challenges, there is a broader concern that the lack of clarity could further hinder economic activities between the U.S. and China. U.S. acquisitions of Chinese companies have already seen a significant decline this year compared to the same period last year.

While firms acknowledge the need to safeguard U.S. national security, they are apprehensive that the uncertainty surrounding the rules could unintentionally lead to risk aversion, causing investors to avoid covered sectors altogether. Amidst the backdrop of political sensitivities and economic implications, the demand for a clearer regulatory framework is intensifying as the input deadline approaches.