Late last month, the US Treasury Department finalized new restrictions aimed at limiting investments by American venture capital firms in cutting-edge Chinese tech startups, particularly those focused on artificial intelligence (AI). These measures, set to take effect in January, will prevent US investors from funding advanced AI models in China. With Donald Trump’s impending presidency, there is speculation that these rules could become even stricter.
Despite the US being a leader in AI development, concerns have risen regarding China’s rapid advancements in this sector. The latest restrictions complement ongoing efforts, such as export controls on advanced computer chips, designed to impede the progress of Chinese AI firms.
The restrictions establish two primary categories prohibiting US investment. The first prohibits funding for companies developing technologies specifically for China’s military and intelligence purposes. The second category applies to consumer-focused AI, where investments are limited based on the AI model’s size. A threshold of 1025 floating point operations per second (flops) is set for non-sensitive AI systems, while a lower threshold of 1024 flops is established for those utilizing biological sequence data, due to potential military applications.
Experts believe that targeting a specific threshold could streamline enforcement compared to broader bans. While this regulatory move may appear limited in scope, it could deter all Chinese AI companies from seeking US investment in the future, particularly if Trump’s administration decides to tighten these regulations further.
Early signals from the Trump administration suggest a tough stance toward China, as seen in proposed legislation aimed at increasing taxes on investments directed towards Chinese enterprises. Such measures reflect a broader inclination to curb US investment in China.
Short-term repercussions for the Chinese AI sector remain uncertain, as US-China investment flows have already diminished significantly due to strained relations, regulatory uncertainties, and a slowing Chinese economy. Nonetheless, there is potential for renewed interest from US investors, although the new restrictions may compel them to conduct extensive due diligence before pursuing any investments in Chinese AI startups.
As the outbound investment rules will officially begin on January 2, further clarifications from the Treasury Department are expected. There is also an intention to collaborate with G7 allies to implement cohesive measures preventing Chinese AI firms from seeking funding in other nations.
The potential evolution of these regulations under a second Trump administration poses significant uncertainty. While some investors might resist stricter regulations, those influencing Trump’s policies may advocate for an expanded framework targeting additional Chinese sectors. This situational fluidity underscores the shifting landscape of US-China tech relations and the complex dynamics of global investment strategies.
