China’s Options for Retaliation Are Few After U.S. Investment Ban

China is unlikely to hit back at the U.S. blow for blow over the Biden administration’s new investment ban on certain Chinese tech companies. That’s because Beijing is limited both in its ability and desire to fire a big salvo, analysts say.

American tech companies aren’t as reliant on Chinese investments as their Chinese counterparts are on U.S. capital. China is also grappling with worsening macroeconomic conditions and falling investor confidence, which makes it less inclined to escalate an economic standoff, they say. On the political front, Beijing is also seeking to sustain a diplomatic thaw with Washington.

This week, the U.S. issued an executive order banning Americans from investing in Chinese companies developing advanced semiconductors and quantum computers and requires American investors to notify Washington about investments in other types of semiconductors and artificial intelligence. The limits, which come into place next year, amp up the race between the two major rivals over who controls the next generation of critical technology.

On Thursday, China’s Commerce Ministry said America’s actions had deviated from market norms, and the U.S. was disrupting global supply chains and trade. Its Foreign Ministry blasted the moves as “blatant economic coercion and tech bullying” by the U.S., adding that the country would move to protect its rights. 

Despite the rhetoric, analysts and businessmen believe the outbound investment measures aren’t enough to change the calculus in a strained bilateral relationship that both sides are trying to improve. China has known such measures were coming for a long time, and some say the new rules are less strict and more narrowly targeted than many feared—at least in their current form.

Instead, Beijing is more likely to retaliate in other domains, such as by imposing more export restrictions over key materials that China has significant influence and control over—like rare earths or particular minerals. 

President Biden, speaking at a political fundraiser on Thursday, referred to China’s weakening economy and the problem that poses for its leaders. “China is a ticking time bomb in many cases,” Biden said, noting China’s high youth unemployment and an aging workforce. 

Still, he said, he wants a “rational relationship” with Beijing. “I don’t want to hurt China,” he said in Utah.

In July, China set export restrictions on gallium and germanium, two minerals the U.S. and experts have said are key to producing semiconductors, missile systems and solar cells. Beijing’s move was viewed by experts as retaliation against U.S. export restrictions aimed at curbing Beijing’s high-technology industries.

“We expect China to retaliate with some high-profile but non-escalatory moves,” said Xiaomeng Lu, the head of risk consulting firm Eurasia Group’s geotechnology practice. She forecast that authorities will deal harsh judgments on merger and acquisition deals involving U.S. companies, or experiment with further Chinese export control restrictions.

Lu said the immediate impact of the order would be limited, as the U.S. has already put in place prior restrictions on such sectors, and cross-border investment flows between the U.S. and China were already at historic lows. Investment into China by U.S. venture capital and private-equity firms collapsed to about $400 million in the first quarter of this year, compared with a peak of roughly $35 billion in 2021, she added.

In the longer term, China would escalate its search for substitutes to restricted U.S. technology, said Ja Ian Chong, an associate professor in political science at the National University of Singapore, including using proxies to buy or invest in foreign companies that could have access to such key technologies.

Whether the U.S. and China would embark on a new wave of tit-for-tat measures is an issue governments and experts are watching.

Following previous U.S. measures, China has hit back at Washington, at times in a more limited way.

A year ago, when then-House Speaker Nancy Pelosi visited Taiwan, China reacted with days of large-scale military exercises, halted cooperation with Washington on issues including climate and froze some military contacts. In 2018 and 2019, as both countries placed tariffs during the trade war, Beijing had a harder time retaliating in proportion to Washington’s measures because it imports fewer products from the U.S.

The U.S. is a large and mature market for venture capital and money flows between the two countries are asymmetrical.

The new executive order coincides with a renewed effort by the Biden administration to re-engage with Beijing and halt a monthslong spiral of worsening relations.

Among recent efforts include last month’s visits to China by Secretary of State Antony Blinken

On Thursday, Chinese state media highlighted what it portrayed as a contradiction between her words and the new investment limits. An editorial by China’s state-run Xinhua News Agency accused the U.S. of sending conflicting signals by rolling out the measures after senior American officials had visited China and reassured authorities that they had no intention of decoupling from China.

While the new rules have already provoked Beijing’s ire, “there is a conscious effort by Biden to lower the U.S.-China temperature,” Edison Lee, a technology analyst at investment bank Jefferies, wrote in a research note Thursday.

More broadly, others argue that there is a limit to China’s willingness to follow through on its threats, given its economic woes. Data released this week showed the Chinese economy may be mired in a deflationary cycle, with consumer prices in July having fallen for the first time since 2021. This adds to other signs of economic distress including falling exports, high youth unemployment and a prolonged real estate slump.

“Given the precarious macroeconomic conditions in China at the moment, they can’t really risk additional retaliation that would deter third-country investment in China,” said Emily Benson, a senior fellow focused on trade and technology at the Center for Strategic and International Studies.

In addition, she said the Biden administration rules are still in a draft stage. Given the back and forth between industry and government that typically precedes the final implementation of any such regulations, it could be as long as a year before the final rules take shape and are implemented, she said.

“Nothing is set in stone,” she said, describing the proposed rules as the White House’s “wishlist.”

Write to Liza Lin at [email protected] and Dan Strumpf at [email protected]