U.S. Restricts Quantum Tech Investments in China, Citing National Security Risks

Insider Brief

• The U.S. Department of the Treasury announced new restrictions on American investments in China’s quantum technology sector, aiming to prevent advancements in quantum computing that could strengthen China’s military and intelligence capabilities.
• Under the rule, U.S. companies are prohibited from making certain investments in quantum and other sensitive technologies in China and must notify the Treasury before entering related transactions, adding a regulatory checkpoint for potential national security risks.
• The rule, which complements existing export controls, follows extensive consultations with Congress, industry, and international allies, marking a strategic effort to maintain U.S. dominance in critical technologies while limiting China’s progress in quantum innovation.

The U.S. Department of the Treasury issued new regulations that prohibit certain American investments in China’s quantum technology sector and other frontier technologies, according to a White House briefing on the move.

The regulations, based on President Biden’s August 2023 executive order, restricts U.S. investments in quantum computing, artificial intelligence, and microelectronics, areas deemed crucial to next-generation military technology. It’s considered another step in the Biden administration’s effort to prevent sensitive technology from aiding China’s military and intelligence capabilities.

According to the Treasury Department, the move is designed to curb China’s progress in quantum technologies that could eventually bolster its military, surveillance, and cybersecurity infrastructures. Quantum technology, which includes quantum computing and quantum information science, has transformative potential, from breaking sophisticated encryption to creating highly secure communication networks. U.S. officials say these advancements pose a risk if they fall under foreign control or serve foreign military modernization efforts.

In a statement from the Treasury Department on the new regulations, Paul Rosen, Assistant Secretary for Investment Security said that investments can often include underlying advantages that accompany these capital flows, including access to talent and management advice.

“The Biden-Harris Administration is committed to protecting America’s national security and keeping critical advanced technologies out of the hands of those who may use them to threaten our national security. Artificial intelligence, semiconductors, and quantum technologies are fundamental to the development of the next generation of military, surveillance, intelligence and certain cybersecurity applications like cutting-edge code-breaking computer systems or next generation fighter jets. This Final Rule takes targeted and concrete measures to ensure that U.S. investment is not exploited to advance the development of key technologies by those who may use them to threaten our national security,” said Rosen adding, “U.S. investments, including the intangible benefits like managerial assistance and access to investment and talent networks that often accompany such capital flows, must not be used to help countries of concern develop their military, intelligence, and cyber capabilities. Secretary Yellen has overseen and directed Treasury’s extensive engagement with stakeholders, experts, and allies to ensure the effectiveness of this measure, and that the rule will not jeopardize the open investment environment that benefits the United States.”

A “Final Rule,” in Rosen’s statement, refers to the official, legally binding version of a regulation after it has gone through a drafting, proposal, public comment and review process. It does not mean that this will be the last word on regulating these advanced technologies.

Extending Current Export Controls

The policy aims to close gaps in the U.S. regulatory framework by extending current export controls on sensitive technologies to include American financial investments. While exports of quantum-related technology to China have been restricted, U.S. officials worry that investments in Chinese companies could inadvertently speed up China’s development in these fields.

“Countries of concern,” including China, are exploiting outbound U.S. investments to accelerate technological advances in ways that may threaten U.S. national security, according to the White House statement. The Biden administration has emphasized that limiting investments in quantum and related fields is vital, as China pursues technological parity with the U.S. in strategic areas, including secure communications, intelligence operations and military command systems.

The rule specifies that, in addition to outright prohibitions, U.S. companies must notify the Treasury Department before engaging in certain transactions involving quantum technologies. The requirement is intended to create a regulatory checkpoint for U.S. firms considering investments that could contribute to China’s quantum capabilities.

The Treasury Department’s statement underlined that while open investment policies have long benefited the U.S. economy, unchecked capital flows into sensitive technology sectors can conflict with national security interests. Limiting U.S. investment in quantum technology in China is part of the administration’s strategy to protect American strategic advantages in military and intelligence applications.

According to the statement from the Treasure Department, the Final Rule defines key terms and offers more detail on the program’s implementation, including:

• Obligations of a U.S. person regarding a covered transaction;
• Categories of covered transactions and excepted transactions;
• Technical specifications for certain technologies and products in the areas of semiconductors and microelectronics, quantum information technologies, and artificial intelligence;
• Information that a U.S. person is required to provide to Treasury as part of a notification;
• The knowledge standard and expectations for a U.S. person to conduct a reasonable and diligent inquiry prior to undertaking a transaction; and
• Conduct that would be treated as a violation of the Final Rule and applicable penalties for such conduct.

Bipartisan Consultations, Meetings With Allies, Tech Leaders

The rule follows several months of consultations with a wide range of stakeholders, including bipartisan members of Congress, tech industry leaders, and foreign allies. U.S. officials sought to ensure the regulation addresses national security concerns without unnecessarily stifling private sector growth or impeding global partnerships. By requiring notifications for certain transactions, officials aim to enhance monitoring capabilities, even as the rule places outright restrictions on specific areas deemed too sensitive.

This regulatory shift comes as the U.S. works to maintain a competitive edge in quantum technology amid rapid advances worldwide. China’s investment in quantum research has grown substantially over recent years, supported by state-led initiatives aiming to place China among the global leaders in quantum technology. For U.S. officials, restricting capital investment in China’s quantum sector is an essential safeguard as American researchers and companies pursue similar breakthroughs that could redefine encryption standards, cybersecurity practices, and computing power for years to come.

The Treasury Department noted that the rule will complement existing export controls, which already restrict sensitive quantum-related technology transfers to China. By extending oversight to include financial transactions, the administration said the overall effort is intended to prevent potential exploitation of American capital and expertise that could bolster China’s ambitions in critical technologies.