The Department of the Treasury on Friday issued its Notice of Proposed Rulemaking for US investment in China. At this point, the bar for action on China is so low there may be no way to be disappointed. But the Notice makes clear that Treasury has no intention to restrict investment into China to any noticeable extent.  

Substantial American investment can be dated to 1999 when direct investment (a 10 percent stake or more) rose by half to over $9 billion. Or it can be dated to 2005 when investment in Chinese stocks and bonds nearly doubled to $48 billion. Why are we just addressing it now? The answer is some Americans want to put money anywhere they like. The aggressiveness and brutality of Xi Jinping’s regime, starting 2013, should have changed their view.

It didn’t for Steve Mnuchin’s Treasury. At the end of 2016, US holdings of mainland Chinese stocks and bonds stood at $368 billion. At the end of 2020, the figure was $1.15 trillion. America can’t be tough on the PRC while providing near $200 billion in annual financing. Treasury and friends often claim only knowhow matters, not capital flows. If the US sends Chinese technology firms $200 billion, it doesn’t matter?

Xi’s suppression of economic opportunity did eventually discourage investors, and the value of American portfolio holdings fell in 2021 and 2022 (latest). But it wasn’t due to anything done by Janet Yellen’s Treasury, quite the opposite. In July 2021, the Biden administration indicated American money shouldn’t “enhance the technological capacity of our competitors.” But it was August 2023 before an executive order (EO) appeared.

Ten months later, we finally have the Notice to someday implement the EO. It has a comment period, to be followed by the actual regulations, and the implementation date after that. Treasury has managed to stall to where the election can allow the EO to be dropped, making the whole process fraudulent. Evaluating the quality of this IOU is probably a waste of time, but here goes.

The Notice does one important thing right, mostly. It rejects creating a list of foreign entities to which the EO applies—too easy to game by creating new entities. And it raises all investments which reach the standard of requiring notification to the standard of being prohibited, if the foreign entity is targeted by an existing US government list. This is a needed step, though it ties the EO to those easily gamed lists.

The flaws of the Notice are overwhelming. It permits all investment in traded securities, on any exchange or over the counter. The justification given is a lower likelihood of transferring intangible benefits. Prior to that passage (page 61), capital was four times included as needing limitation along with knowhow (pages 8, 16, 51, 55). Then, capital suddenly didn’t matter.

The explanation is the same as for most poor China policy: National security is of overriding importance, until a lot of money is involved. If the US revisits Mnuchin-like years, with funds pouring into the PRC’s stocks and bonds, the EO will watch from the sideline. If the money goes to listed and heavily subsidized Chinese quantum computing, semiconductor, or AI enterprises, Treasury doesn’t care.

It may not even know. Defenders of China investment trumpet markets yet malign transparency. There are sector breakdowns for direct investment, not for portfolio. The Notice cites Pitchbook for relevant transactions because Treasury has nothing. It could have gathered such data for years, but the financial community wants China activity dark. New investment regulations must detail amounts of spending by sector and disclose notified and prohibited transactions (in aggregate).

Then there’s the stalling. Nearly three years after the issue was raised, the Notice still includes dozens of supposedly outstanding questions, when responses could have been gathered in 2021–2. Treasury can’t even say how much investment its proposed rules will prohibit. The clearest aspect of this process is intent to delay.

Treasury isn’t alone, unfortunately. The Republican chair of the House Financial Services committee, Patrick McHenry, praised the Notice. McHenry’s first hearing as chair in 2023 was convened to express adamant opposition to restricting investment in the PRC. His praise is a signal he sees little coming of the EO. Correctly.

There are legitimately difficult China policy choices. How to deter an attack on Taiwan, what’s the PRC’s culpability for Covid, is industrial policy necessary. It shouldn’t be difficult just to stop helping Chinese technology development, unless all the tough talk is fake.

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