US bans investment in large Chinese AI startups

The United States Treasury Department has unveiled stringent new regulations governing American investments in Chinese artificial intelligence companies, marking a significant escalation in technological competition between the world’s two largest economies.

Policy framework and implementation: The new restrictions, taking effect in January 2024, establish clear thresholds and guidelines for US investment in Chinese AI companies.

• The regulations create a complete ban on US investments in companies developing technology specifically for China’s military and intelligence services
• A computational threshold of 10^25 FLOPS (a measure of computing speed) has been set as the cutoff point for permissible investments in Chinese AI companies
• For AI systems working with biological sequence data, a lower threshold of 10^24 FLOPS applies

Current market impact: The immediate scope of these restrictions appears relatively targeted, affecting only a small segment of China’s AI ecosystem.

• Only two Chinese companies, ByteDance and Zhipu AI, have publicly disclosed models exceeding the specified computational thresholds
• US investors will need to implement enhanced due diligence processes when evaluating potential Chinese AI investments
• Existing investment flows between the US and China in this sector are already at historically low levels

Strategic considerations: The Biden administration has adopted a precise, focused approach to these restrictions while laying groundwork for broader international cooperation.

• The US government is actively engaging with allies to implement similar investment restrictions, aiming to prevent Chinese companies from accessing alternative funding sources
• The policy follows a “small yard, high fence” strategy, focusing on specific high-risk areas rather than broad-based restrictions
• These measures are designed to slow China’s progress in advanced AI development while maintaining some channels for legitimate business activity

Looking ahead: Political transitions and evolving technological capabilities could reshape the regulatory landscape.

• The incoming Trump administration may significantly expand these restrictions to encompass additional Chinese technology sectors
• Questions remain about the effectiveness of computational thresholds as a regulatory tool, given the rapid pace of AI advancement
• The long-term impact on global AI development and US-China technological competition remains uncertain

Future implications: While these restrictions represent a measured approach to managing technological competition with China, their effectiveness will largely depend on international coordination and the ability to adapt to rapid technological change in the AI sector.