U.S. Treasury Secretary Janet Yellen this week said that if the Biden administration issues expected new rules limiting outbound U.S. investment in China, they will not be highly disruptive to trade between the two countries, and will focus on national security concerns.

“We are looking carefully at outbound investment controls, and they would serve as a complement to the export controls that we have in place, to make sure that we’ve covered all the channels by which technologies can be transferred to China that we think pose national security concerns,” Yellen said.

The rules, expected from the Biden administration sometime this summer, would focus on semiconductors, quantum computing and artificial intelligence, the Treasury secretary said. Yellen added that they will be “narrowly scoped” and “would not be broad controls that would affect U.S. investment broadly in China, or in my opinion, have a fundamental impact on affecting the investment climate for China.”

Yellen’s remarks came in an interview with Bloomberg Television on Monday, from the sidelines of a meeting of the finance ministers of the world’s largest economies in Gandhinagar, India.

Yellen indicated that she had spoken to Chinese officials about the rules, saying, “What I tried to explain to our Chinese counterparts is that our desire is to make these U.S. policies clearly national-security focused, transparent and narrow, and that we’re not attempting to stifle economic progress in China. We have, and want to continue to have, deep economic ties.”

Yellen was careful in her language to suggest that a final decision about whether to issue the outbound investment rules has not been made.

Addition to export controls

The Biden administration’s effort over the past two years to prevent China from obtaining certain technologies, and a years-long effort by the U.S. to block certain Chinese technology firms from participating in essential infrastructure, like 5G broadband systems, have angered China.

Most recently, the administration has put measures in place to block Chinese companies from purchasing cutting-edge microchips and the equipment to manufacture them.

These policies have led to accusations by China that the aim of the U.S. is to block China’s economic progress in order to prevent it from playing a larger role in the global economy and in international relations.

Those concerns were repeated after Yellen’s recent remarks.

China replies

In a press conference on Monday, Chinese Foreign Ministry spokesperson Mao Ning commented on the coming restrictions.

“China opposes U.S. politicizing and weaponizing of trade and tech issues,” she said. “It is in no one’s interest to place arbitrary curbs on normal technology cooperation and trade, violate the market economy principles and destabilize global industrial and supply chains.”

She added, “We hope that the U.S. will follow through on President Biden’s commitment of not seeking to ‘decouple’ from China, halt China’s economic development or contain China and create a sound environment for China-U.S. economic cooperation and trade.”

In her remarks Monday, Yellen stressed the administration’s desire to improve relations with China, saying, “We now have a new economic team in China that we need to establish relationships with. We need to get our relationship back in a more stable place with a floor under it, and try to promote general understanding between our countries.”

Chinese economic woes

In the background of the discussion of U.S. restrictions on outbound investment in China is increasing evidence that the Chinese economy is struggling. Economic growth has slowed sharply, and the yuan has been losing value against other global currencies.

On Monday, official numbers released by Beijing said that the economy had grown by just 0.8% from the end of the first quarter of 2023 through the end of the second quarter, a rate much lower than expected.

Also this week, the country’s troubled real estate conglomerate, Evergrande, revealed that in 2021 and 2022, it lost more than $81 billion, and still carries obligations worth $340 billion, including some $140 billion to raw materials suppliers and many thousands of Chinese who paid in advance for homes that were never built. Evergrande has become a symbol of the country’s deeply troubled real estate sector, which is awash in bad debt.

In her remarks on Monday, Yellen noted China’s struggles, and said that there is some danger of weakness in its economy having an impact around the world.

“China has seen slower growth than they expected upon opening up from COVID,” Yellen said. “Consumer spending has been relatively weak. It looks like consumers are more focused on building back their savings buffers, and so growth has been slow when, as you know, youth unemployment is quite high there.”

She said that she expects a slowdown in China to have only a small impact on the U.S.

“Countries do depend on strong Chinese growth to promote growth in their own economies, particularly countries in Asia, and slow growth in China can have some negative spillover to the United States,” she said. “Our growth is slowed but our labor market continues to be quite strong. I don’t expect a recession.”
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