Chinese Chips, Quantum And AI Now On US Investment Blacklist

The US treasury department finalized a rule on Monday that limits domestic entities' investment in Chinese semiconductors and microelectronics, quantum information technologies, and AI.

The original rules were proposed in June after being introduced in August 2023 on grounds of national security. In addition to prohibiting transactions considered to be an acute threat, the regulations also require US-based individuals and companies to notify the Treasury about others that may contribute to security risks. Those notifications can be completed using electronic filing.

They are now set to go into effect on January 2 and are inclusive of Macau and Hong Kong, as well as mainland China.

"The Biden-Harris Administration is committed to protecting America's national security and keeping critical advanced technologies out of the hands of those who may use them to threaten our national security," stated Assistant Secretary for Investment Security Paul Rosen.

Rosen reasoned that the named technologies are "fundamental to the development of the next generation of military, surveillance, intelligence and certain cybersecurity applications like cutting-edge code-breaking computer systems or next generation fighter jets."

He added that US investment should not be exploited to advance their development by adversaries.

But it's not just the money that is inadvertently being used for Beijing's gain. Rosen, and the US Treasury [PDF] also alleged that investment comes with "intangible benefits" like managerial assistance and access to investment and talent networks.

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When it comes to semiconductors and microelectronics, transactions involving specific electronic design automation software, certain fabrication and advanced packaging tools, the design or fabrication of advanced integrated circuits, advanced packaging techniques, and supercomputers are prohibited. Those related to the design, fabrication, or packaging of integrated circuits not covered by these prohibitions must be reported to the government.

Banned quantum transactions include those related to the development of quantum computers or production of their critical components, as well as their sensing platforms, networks, and communication systems.

For AI, its end use is what will get it banned. Also on the prohibited transaction list is the development of any AI system trained using computing power greater than 10²⁵ computational operations. Transactions involving AI with computing power less than that but greater than 10²³ computational operations needs to be disclosed to the government, as are those "designed or intended to be used for certain end uses or applications."

The Department is a little vague and muddy in some communications as to what end uses investors should be wary of. A deeper dive sees the actual rule [PDF] outline what areas the government is concerned about. That includes anything where AI systems could "enable the military modernization of countries of concern- including weapons, intelligence and surveillance capabilities – and those that have applications in areas such as cybersecurity and robotics." Also included are software and hardware that incorporate such AI systems.

The rule notes the US government has received feedback from stakeholders who are concerned about the breadth of the definition. It reveals that was partially intentional – to create a scope wide enough to contain all AI-related transactions that could benefit China's military aspirations, but that only those developing or substantially modifying these type of AI systems are impacted.

There are some exceptions to the new regulations, for example publicly traded securities, derivatives, and certain LP investments – and complete China buyouts are exempt.

Violators may face fines up to $368,136 or twice the value of the prohibited transaction, whichever amount is higher. ®