On August 9th, President Biden signed an executive order which addresses investment from US companies and individuals into China. The executive order is a follow-up on the October 7, 2022 order to ban exports of advanced chips and other strategic technology, but the executive order focuses on investment in Chinese firms that operate in these areas, which was seen as a loophole in the October 7 order.

The Investment Screening order stipulates certain areas that are simply banned from investments, some areas where the government needs to be notified and then some areas that are completely exempt. This balance has been struck in order not to force US businesses and companies to channel their investments in “non-national security areas” through 3rd countries and in order to differentiate and nuance the messaging in the order. Oh – and the order exempts index funds, which means that we will keep relevant China-related ETF’s in our portfolio when we see fit!

Republican split

At first glance, the Investment Screening order appears to be a blanket barrier against US investments in China and thus an aggressive chess move. However, closer scrutiny reveals a layered approach. It bans certain investments, necessitates notifications for others, and leaves a few untouched. Such a structure does two things. Firstly, it ensures US businesses don’t redirect their investments via third countries. Secondly, it subtly communicates that not all Chinese sectors are under scrutiny, offering a nuanced stand instead of a broad-stroke policy.

The inability of the US Congress to reach a bipartisan consensus on restricting US investments in China’s strategic sectors added a layer of complexity. The Republican Party’s internal tussle – between a strong anti-China sentiment and a pro-business stance – forced the onus onto the President. Crafting an executive order, especially one that could potentially rock the US-China trade boat and induce market panic, required meticulousness. And the administration showed patience, ensuring that the terms were well-thought-out.

What does this mean for US-China Relations

The period post the October 7 order has been dynamic, characterized by escalating trade tensions and, more recently, by promising diplomatic interactions between the two superpowers. Where does Biden’s executive order fit in this evolving puzzle?