SUMMARY
- President Trump’s presidential memorandum directs US agencies to develop policies further restricting investment flows between the US and China; agencies will face a balancing act in cushioning the impact of these measures on US corporates, US investors, and the US-China relationship
- The statement’s hostility towards Chinese investment reinforces our skepticism about the viability of a major US-China deal this year; even if Trump dilutes these measures, China’s government and corporates will be wary of the political risks of major Chinese investment in the US
- The memo signals that the Trump administration will look to restrict US portfolio investment in Chinese firms linked to US-China tech competition and China’s military; the administration is also reviewing broader measures to limit US investment in Chinese equities
On Friday (Feb. 21), President Trump signed a National Security Presidential Memorandum (link HERE) directing US agencies to carry out a two-pronged approach to investment policy: fast-tracking direct investment in the US that comes from allies and partners, while tightening regulations on investment flows with “foreign adversaries” and China in particular. This note focuses on the China-related measures and the implications for investors, benefiting from the input of 22V’s head of Washington Policy Research Kim Wallace.
A POLITICAL BROADSIDE AGAINST US-CHINA INVESTMENT
The document is a memo rather than executive order, meaning that it directs US agencies to develop policies but does not carry any legal weight. It thus remains to be seen how strong and how comprehensive the actual policies will be in design and implementation given potential risks for US corporates with investments in China, US investors and financial securities firms active in Chinese equities, and Trump’s ability to strike a deal with Xi. As a political statement, however, it advocates for strictly limiting US-China investment flows and effectively endorses investment decoupling:
- Chinese direct investment in the US. The memo accuses China-linked investors of “targeting the crown jewels of the United States technology, food supplies, farmland, minerals, natural resources, ports, and shipping terminals.” It pledges to restrict Chinese direct investment in strategic sectors by expanding the remit of the Committee on Foreign Investment in the United States (CFIUS), the Treasury-chaired body that reviews M&A transactions for national security risks. The memo proposes giving CFIUS greater authority over “greenfield” investments (which is currently limited to real estate transactions), further restrict Chinese investment in AI and other emerging technologies and reduce the use of complex mitigation agreements used to permit otherwise off-limits projects. (Ironically, the various schemes proposed to save TikTok’s US operations are the poster children of such agreements). CFIUS restrictions and US-China tensions have already cratered Chinese direct investment in the US, but such measures would deliver another blow. Some of the proposed CFIUS reforms would likely require legislation from Congress.
- US direct investment in China. The memo asks agencies to consider new or expanded restrictions on US outbound investment in strategic sectors such as semiconductors, AI, quantum, and biotech, which would be applied to “private equity, venture capital, greenfield investments, corporate expansions, and investments in publicly traded securities, from sources including pension funds, university endowments, and other limited-partner investors.” It also tasks a review of whether to suspend or terminate a 1984 tax treaty with China, with the aim of discouraging (all) US corporate investment in China by ending corporate exemption from double taxation. These policies would strengthen and broaden existing measures, imposed by the Biden administration, which restrict outbound investment by corporations and private equity firms in strategic sectors in China. Congress has also been considering legislation to restrict US outbound investment in strategic sectors.
- US portfolio investment in Chinese companies: The memo pledges to “use all legal instruments to deter United States persons from investment in the PRC’s military-industrial sector.” In a separate section it calls for a review of regulatory issues that could complicate the ability of Chinese firms – especially tech companies using the variable interest entity (VIE) structure – to list on US exchanges (see detailed discussion below).
- Third countries forced to choose sides between Washington and Beijing: The memo sets out an overall goal of “ensuring that artificial intelligence and other emerging technologies are built, created, and grown right here in the United States.” To that end, it outlines a “fast-track” process to facilitate investment from “specified allied and partner sources” in the US tech sector. At the same time, it specifies that “investment restrictions on foreign investors access to United States assets ease in proportion to their verifiable distance and independence from predatory investment and technology-acquisition practices of the PRC and other foreign adversaries or threat actors.” This is a message to Gulf countries and other third parties that large investments or tie-ups in China’s tech sector will make it harder to invest in the US, especially in AI and related fields.
NOW ABOUT THAT TRADE DEAL…
We have been skeptical about the prospects of a US-China deal this year, and in our view the investment memo and other recent actions provide more reasons to be dubious. A US-China deal would entail Chinese commitments to purchase large amounts of US goods and potentially to invest in the US as well. At the very least, the latter is hard to square with a policy directive that takes an overtly hostile stance towards Chinese investment.
To be sure, Trump could reverse course from the memo to court major investment projects from China. But the politics of Chinese investment in the US were always thorny and only get more so now that Trump has accused Chinese investment of targeting the “crown jewels” of the United States. China’s government and corporate investors will feel uneasy about committing to invest in the United States given the statement’s suspicion about the motives of Chinese capital and the aim of actively discouraging US corporations and third countries from investing in China.
In his first administration, Trump would often allow China hawks to push through tough measures in periods when he became less interested in a trade deal. Trump’s approval of tough actions in the last week seems to repeat this pattern, perhaps indicating the President’s frustration that Chinese leader Xi Jinping did not offer quick concessions on fentanyl as did the leaders of Canada and Mexico. Trump’s new national security team and trade officials are at least as hawkish towards China as those of his first administration and will continue to pursue tough policies unless restrained by the President or strong political and economic pushback.
Also on Friday, the Office of the US Trade Representative (USTR) released for public comment a series of proposed actions targeting China’s dominance in shipbuilding and maritime logistics. The proposal would charge a docking fee of up to $1 million for Chinese-operated ships and a fee of up to $1.5 million for Chinese-built ships, among other charges. (See HERE for a short summary on X/Twitter of the measures by Biden trade advisor Peter Harrell). The fees will raise costs for shippers (some of which will be passed on to consumers) but much more comprehensive efforts would be needed to dent China’s dominance in global shipbuilding and revive the industry in the US (which ranks 19th globally).
Less publicly, Bloomberg has reported that Trump officials have met with Japanese and Dutch officials to tighten restrictions on semiconductor equipment exports to China, and (separately) put pressure on Mexico to increase tariffs on its own imports from China.
THROWING SAND IN THE GEARS OF THE DEEPSEEK EQUITY RALLY
We noted in our 2025 outlook report (link HERE) that “US- and HK-listed Chinese equities would be vulnerable should the Trump administration impose new restrictions on US capital flowing to leading Chinese companies.” We also observed that “US national security officials view major Chinese companies as tools of Beijing’s geopolitical aspirations.”
The investment memo underscores those risks, with four measures focused on US equity investment in Chinese firms:
- Pledge to counter US investment in “Chinese-military linked companies.” The memo orders a review of Trump and Biden executive orders that prohibit US persons from investing in Chinese firms linked the “military-industrial sector.” US officials have often taken a broad view of that definition, with Biden’s Defense Department including e-commerce giant Tencent in its list of military-linked companies in January. Heated competition in AI, and the prominent role of Chinese commerce companies such as Alibaba in China’s AI endeavors, mean a significant risk that the Trump administration could look to prohibit US investment in these firms by placing them on various blacklists.
- Reviewing the US-China audit regulation agreement. The memo tasks Treasury and other agencies to “determine if adequate financial auditing standards are upheld for companies covered by the Holding Foreign Companies Accountable Act.” This language puts a spotlight on an audit agreement between US and Chinese financial regulators signed in 2022. Regulators on both sides have been abiding by the deal, but there is a risk that Trump could put direct pressure on US regulators to stop cooperation or drive a tougher line in audit enforcement. If the audit agreement breaks down, the Holding Foreign Companies Accountable Act requires all Chinese firms to delist from US exchanges within two years. Most prominent US-listed Chinese tech firms, such as Alibaba and Tencent, are also listed in Hong Kong. This would limit the disruption to the firms and to shareholders in the event they must delist from US exchanges. Chinese firms that lack a Hong Kong listing would be more impacted.
- Review the variable interest entity and subsidiary structures used by Chinese tech firms to list in the US and Hong Kong. Most Chinese tech firms use the VIE structure to list in the US and Hong Kong. Under former chair Gary Gensler, the SEC examined VIEs and mandated additional disclosures by firms using this structure. If the SEC decides that the VIE structure presents an unacceptable risk to US investors, the agency could force these firms to delist from US exchanges and impose fiduciary standards that make it difficult for some US institutional investors to invest in these firms even through Hong Kong listings.
- Consider restrictions on US pension plan contributions to “foreign adversary companies.” The language suggests that the Trump administration may reinterpret fiduciary standards under the Employee Retirement Security Act of 1974 to restrict pension plans from investing in Chinese companies, particularly those linked to the Chinese military.
The memo makes it clear that at a minimum, national security hawks will use political pressure to discourage portfolio investment in select Chinese firms, especially those linked to US-China tech competition. Whether or not the administration will also use financial regulatory tools (audit regulation, fiduciary standards) depends on the views of Trump’s appointees to regulatory agencies, the amount of political pressure from the White House on the regulators and US Treasury, and legal interpretation of the regulatory toolkit.
