US-China investment restrictions: CFIUS, outbound investment rules, and sanctions

For decades, capital flowed relatively freely between the United States and China. American institutional investors held Chinese equities, US companies invested in Chinese subsidiaries, and Chinese companies listed on US exchanges. That era of relative openness has ended. Investment restrictions are now a permanent feature of the US-China relationship, and they continue to evolve.

The regulatory framework operates in both directions. Inbound investment — Chinese capital entering the United States — is subject to review by the Committee on Foreign Investment in the United States (CFIUS). Outbound investment — US capital flowing to China — is now restricted in certain sectors through regulations effective January 2025. Both frameworks have expanded significantly and show no signs of reversal.

For investors, this creates a compliance landscape that requires ongoing attention. The rules are complex, the enforcement is active, and the penalties for violations are severe. This guide explains the current state of US-China investment restrictions, with a focus on what American investors and companies need to know to navigate the environment legally and prudently.

The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee chaired by the Treasury Department, with members from the Departments of Defense, State, Commerce, Homeland Security, Energy, and other agencies. Its mandate is to review foreign investments in US businesses for national security risks. While CFIUS reviews investments from all countries, Chinese investments receive particular scrutiny.

CFIUS has two main jurisdictional bases for review: covered control transactions, where a foreign person acquires control of a US business; and covered real estate transactions, involving the purchase or lease of real estate near sensitive facilities (military bases, ports, government sites). The Foreign Investment Risk Review Modernization Act (FIRRMA), passed in 2018, expanded CFIUS jurisdiction to include certain non-controlling investments in businesses involved in critical technology, critical infrastructure, or sensitive personal data.

For Chinese investors, CFIUS review has become a significant hurdle. Transactions in sectors like semiconductors, artificial intelligence, biotechnology, critical infrastructure, and data-intensive businesses face heightened scrutiny. Even transactions that ultimately receive approval may face lengthy review periods and extensive mitigation requirements. Chinese investment in the US has declined substantially from its 2016 peak of USD 46 billion to under USD 5 billion annually in recent years.

The February 2025 "America First Investment Policy" memorandum signaled further tightening. CFIUS is expected to: restrict investments by Chinese-affiliated persons in technology, critical infrastructure, healthcare, agriculture, energy, and strategic materials; expand the definition of emerging and foundational technologies subject to review; consider terminating existing mitigation agreements and replacing them with stricter conditions; and extend jurisdiction over greenfield investments in sensitive sectors.

While CFIUS restricts Chinese investment into the US, "Reverse CFIUS" — officially the outbound investment restrictions — limits US investment into China. This is the more significant development for American investors seeking China exposure.

Executive Order 14105, signed by President Biden in August 2023, authorized the Treasury Department to regulate US persons' investments in certain Chinese sectors. The final rules, published in October 2024 and effective January 2, 2025, restrict US investment in three sectors: semiconductors and microelectronics, quantum information technology, and artificial intelligence. The rules cover China mainland, Hong Kong, and Macau.

The restrictions operate in two tiers. Prohibited transactions are outright banned: certain advanced semiconductor and quantum computing investments, and AI investments linked to military or intelligence applications. Notifiable transactions must be reported to Treasury but are not prohibited: investments in less advanced chips, certain AI systems, and other covered activities with lower security risk.

Who is covered: US persons, including US citizens, permanent residents, entities organized under US law, and any person within the United States. US persons' controlled foreign entities are also covered. This means that a US fund's offshore subsidiaries cannot bypass the rules. Limited partners in funds are not directly covered, but the fund itself (if US-organized) is subject to the rules.

The prohibited category covers investments that pose the most significant national security risks. These transactions cannot proceed regardless of notification.

In semiconductors and microelectronics, prohibited activities include: development of electronic design automation software for advanced integrated circuits; development of advanced packaging technology; development or production of advanced integrated circuits (below certain node sizes); and development or production of semiconductor manufacturing equipment for advanced processes.

In quantum information technology, prohibited activities include: development or production of quantum computers and related components; development or production of quantum sensors with certain military applications; and development or production of quantum networking and communications systems.

In artificial intelligence, the rules are more complex. Investments in AI systems designed for military, intelligence, or surveillance end-uses are prohibited. Additionally, AI systems trained with computing power exceeding certain thresholds are prohibited regardless of end-use — reflecting the concern that advanced AI capabilities can be dual-use. The specific computing power thresholds were finalized in the October 2024 rules.

Prohibited transactions include: equity investments, convertible debt, joint ventures, and certain other capital deployments. Mere passive investment in publicly traded securities (buying stock on an exchange) is generally excluded, as are certain index fund investments. However, the rules are nuanced, and borderline cases require legal analysis.

Not all covered investments are prohibited. Some must be reported to Treasury but can proceed. The notification requirement allows the government to track US capital flows to sensitive Chinese sectors.

Notifiable semiconductor investments include activities related to integrated circuits that do not meet the advanced thresholds for prohibition — for example, legacy node chip production, certain packaging activities, and less advanced electronic design automation software.

Notifiable AI investments include development of AI systems that do not meet the computing power thresholds for prohibition and are not specifically designed for military or intelligence applications. This covers much of the commercial AI sector in China.

The notification must be submitted within 30 days after the transaction closes. Treasury requires information about the investor, the target, the transaction terms, and the business activities involved. Failure to notify can result in civil penalties up to the greater of USD 250,000 or twice the transaction value.

For most US investors, the practical approach is to establish internal compliance procedures that identify covered transactions before execution, determine whether they are prohibited or notifiable, and file notifications on time. Legal counsel with export control and sanctions expertise is essential.

Beyond the outbound investment rules, US investors must navigate the Entity List, the Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC), and various sanctions programs. These can prohibit transactions regardless of sector.

The Entity List, maintained by the Department of Commerce's Bureau of Industry and Security (BIS), lists foreign parties subject to license requirements for the export, reexport, or transfer of specified items. While primarily an export control tool, the Entity List affects investment because certain transactions with listed entities may be prohibited or require licenses. The list includes major Chinese technology companies, universities, and research institutions.

The NS-CMIC List (formerly the Communist Chinese Military Companies List) identifies companies deemed to support China's military, intelligence, or surveillance apparatus. US persons are prohibited from purchasing or selling publicly traded securities of listed companies. This directly affects investment decisions — holding stock in an NS-CMIC-listed company violates the order.

OFAC sanctions: The Treasury Department's Office of Foreign Assets Control (OFAC) administers sanctions programs that can affect China-related transactions. While there is no comprehensive China sanctions program, targeted sanctions on specific individuals, entities, and activities (forced labor in Xinjiang, fentanyl trafficking, etc.) create compliance obligations. Transactions involving sanctioned parties are prohibited.

The practical impact: Before investing in any Chinese company, check the Entity List, NS-CMIC List, and OFAC's Specially Designated Nationals (SDN) List. If the company appears, additional due diligence is required, and certain transactions may be prohibited.

On February 21, 2025, the White House released the "America First Investment Policy" presidential memorandum, signaling further restrictions on China-related investment. While a memorandum does not have the force of law, it directs agencies to develop regulations and enforcement priorities.

Key provisions include: encouraging investment from allies and partners while restricting investment from "foreign adversaries" including China; expanding CFIUS jurisdiction over greenfield investments by Chinese entities; considering termination of existing CFIUS mitigation agreements and replacement with stricter requirements; expanding the scope of technologies covered by outbound investment restrictions to potentially include biotechnology, hypersonics, and advanced manufacturing; and reviewing whether to extend outbound investment rules to publicly traded securities, index funds, and mutual funds.

The memorandum's reference to extending restrictions to public securities is particularly significant for portfolio investors. Currently, passive investment in publicly traded Chinese stocks is generally excluded from the outbound investment rules. If this exemption is narrowed or eliminated, US investors could face restrictions on buying Chinese equities through standard brokerage accounts.

Implementation timeline: The memorandum directs agencies to take action, but regulatory changes require formal rulemaking. Expect phased implementation over 2025-2026, with proposed rules followed by public comment periods and final rules. Monitor Treasury and Commerce Department announcements for developments.

For American investors, the expanding restrictions create several practical implications:

Due diligence is now essential. Before investing in any Chinese company — whether through direct equity, funds, or other vehicles — verify that the company is not on the Entity List, NS-CMIC List, or subject to OFAC sanctions. This is a baseline compliance requirement.

AI, semiconductor, and quantum investments are effectively closed. The outbound investment rules prohibit US persons from investing in Chinese companies engaged in certain advanced technology activities. Even passive investments may be affected if the target's activities fall within prohibited categories. Conduct detailed analysis before investing in Chinese tech.

Fund investments require review. If you invest in a fund (private equity, venture capital, or hedge fund) with China exposure, the fund's compliance with outbound investment rules affects you indirectly. The fund must have compliance procedures; if it does not, you may have indirect exposure to prohibited transactions. Review fund documentation and compliance policies.

Public market investments remain available with caveats. Buying ADRs, H-shares, or A-shares through Stock Connect is generally still permitted for companies not on restricted lists. But monitor regulatory developments closely. The February 2025 memorandum signaled potential future restrictions on public securities that could change this.

Document your compliance. If you are investing in China through any channel, maintain records of your due diligence: which lists you checked, what you found, and when. In an enforcement action, the ability to demonstrate good-faith compliance efforts matters.

The restrictions affect not only investors but also Chinese companies that rely on US capital and US companies doing business in China.

Capital raising challenges: Chinese companies in AI, semiconductors, and quantum technology can no longer access US venture capital, private equity, or public markets for certain offerings. This has already affected funding dynamics, with Chinese tech companies turning to domestic and non-US sources of capital. Companies in other sectors can still access US capital but face enhanced scrutiny.

ADRs and listing considerations: Chinese companies listed on US exchanges face ongoing compliance requirements, including PCAOB audit access (resolved in principle in 2022-2023 but subject to ongoing monitoring). Companies added to the NS-CMIC List face forced selling by US investors. Some Chinese companies have pursued secondary listings in Hong Kong as a hedge against potential US delisting.

US companies in China: American companies operating in China must navigate both CFIUS (for their Chinese operations' ownership structure) and the outbound investment rules (for any new investments or expansions in covered sectors). Joint ventures with Chinese partners in AI or semiconductor sectors may be prohibited or require restructuring.

The trend is toward bifurcation: US and Chinese technology ecosystems are diverging, with restricted capital flows between them. Companies with cross-border operations must plan for an environment where regulatory compliance is a major cost and business constraint, not an afterthought.

Given the complexity and evolving nature of US-China investment restrictions, investors and companies should implement structured compliance approaches.

Establish a screening process. Before any China-related investment, screen the target against: the Entity List (Commerce/BIS), the NS-CMIC List (Treasury), OFAC SDN List and sanctions programs, and any other relevant restricted party lists. For funds, screen significant portfolio holdings.

Engage legal counsel. The outbound investment rules, CFIUS requirements, and sanctions programs require specialized expertise. Counsel with export control, CFIUS, and OFAC experience can provide guidance tailored to specific transactions. The cost of legal advice is far lower than the cost of enforcement actions.

Monitor regulatory developments. The February 2025 memorandum is not the end; expect continuing regulatory activity. Subscribe to Treasury, Commerce, and OFAC updates. Engage counsel to track proposed rules and comment opportunities. The compliance landscape will continue to evolve.

Document everything. Maintain records of your screening, analysis, and decision-making. If an enforcement agency questions a transaction, the ability to demonstrate good-faith compliance efforts — including legal advice sought and received — is valuable.

Consider alternatives. For investors who want China exposure but want to avoid compliance complexity, broad-market ETFs with automatic exclusion of restricted companies may be a simpler path than individual stock selection. Consult with tax and legal advisers on the best structure for your situation.

The trajectory of US-China investment restrictions is clear: they will continue to expand and intensify. Barring a major geopolitical shift, the rules will become more restrictive, not less. Several developments to watch:

Expansion of covered sectors: The current outbound investment rules cover AI, semiconductors, and quantum technology. The February 2025 memorandum suggests biotechnology, hypersonics, and advanced manufacturing may be added. Expect proposed rules in these areas.

Potential public securities restrictions: Currently, publicly traded securities are generally excluded from outbound investment restrictions. The memorandum questions this exemption. If regulations are issued restricting US persons from buying certain Chinese stocks, it would fundamentally change the landscape for retail investors.

Enhanced enforcement: As rules have been in place longer, enforcement activity will increase. Civil penalties, forced divestitures, and criminal prosecution for willful violations are all on the table. Compliance is not optional.

Retaliation risk: China may respond with its own investment restrictions affecting US investors. While China has historically welcomed foreign investment, targeted measures against US firms or individuals are possible in response to US actions. This adds another layer of uncertainty.

For investors, the key message is: invest with eyes open, comply with current rules, monitor developments, and plan for continued complexity. The era of frictionless US-China capital flows is over. The current environment demands diligence, expertise, and adaptability.

US government sources:

- Treasury Department: www.treasury.gov — Outbound investment rules and CFIUS

- CFIUS: www.treasury.gov/cfius — Committee on Foreign Investment review

- Bureau of Industry and Security (BIS): www.bis.doc.gov — Entity List and export controls

- Office of Foreign Assets Control (OFAC): www.treasury.gov/ofac — Sanctions programs and SDN List

- Securities and Exchange Commission (SEC): www.sec.gov — HFCAA and ADR disclosure

- Public Company Accounting Oversight Board (PCAOB): pcaobus.org — Audit inspection requirements

Key regulations and executive orders:

- Executive Order 14105 (August 2023): Outbound investment restrictions

- Treasury Final Rules on Outbound Investment (October 2024)

- Holding Foreign Companies Accountable Act (HFCAA) 2020

- Foreign Investment Risk Review Modernization Act (FIRRMA) 2018

- "America First Investment Policy" Presidential Memorandum (February 2025)

Restricted party lists:

- Entity List: www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern

- NS-CMIC List: www.treasury.gov/ofac/ns-cmic

- SDN List: www.treasury.gov/sdn-list

Legal and analysis resources:

- Congressional Research Service (CRS) Reports on US-China relations

- Law firm client alerts (Stanford Law, Harvard Law blogs on China sanctions)

- Center for Strategic and International Studies (CSIS): www.csis.org