As China’s economy slips into deflation, the White House imposes new sanctions against investing there

(Originally published Aug. 10 in “What in the World“) U.S. President Joe Biden issued an executive order restricting American investment in leading-edge technologies in China that it says could help China’s military.

Specifically, the order empowers Treasury Secretary Janet Yellen to control U.S. investment from the U.S. in any Chinese company involved in advanced semiconductors, military applications of artificial intelligence or quantum computing. The order also contemplates requiring U.S. investors to notify the Treasury Dept. of any planned investments into any company developing these technologies.

The latest order continues a tit-for-tat economic war between the U.S. and China that China appears to be losing. China is now officially suffering from deflation. China’s consumer prices in July fell 0.3% year-on-year, their first decline two years. Producer prices, which were already falling, dropped 4.1% in July. China hasn’t seen both consumer and producer prices drop simultaneously since the global financial crisis in 2009.

Deflation is toxic for anyone shouldering massive debts, as revenues follow prices lower, but debt servicing costs remain the same. The declines tend to accelerate once consumers and investors realize that all they have to do is wait to get a better bargain tomorrow on things like high-rise apartments—a dreaded deflationary spiral. That makes it more likely that heavily indebted property developers like Country Garden, already missing some bond payments, will finally tumble and perhaps trigger the financial crisis Beijing has been working for over a decade to avoid.

After maintaining tariffs on Chinese imports imposed by his predecessor, Donald Trump, Biden last year imposed rules aimed at blocking Chinese access to AI algorithms, supercomputer chips and the equipment needed to make advanced computer semiconductors.

The White House has also been looking into imposing restrictions on its ability to use cloud-computing services from companies like Amazon, Google, and Microsoft. The White House would require cloud-computing services to get U.S. government approval before selling such services to customers in China.

China retaliated against Washington’s moves by imposing its own tariffs on U.S. goods. In June, it banned chips from U.S. company Micron Technology from use in any equipment handling “sensitive” information. Then in early July, Beijing said it would restrict exports of two metals used in making chips—gallium and germanium.

Beijing has also mounted a legal campaign against foreign businesses, including a counter-espionage law that many fear treats ordinary economic and financial research as spying. Then there’s the new Law on Foreign Relations, passed in July, which gives Beijing the U.S.-style extraterritoriality needed to enforce its laws on companies at home and abroad.