Exclusive-US warned China to expect updated export curbs in October-US official

By Karen Freifeld and Alexandra Alper

NEW YORK/WASHINGTON (Reuters) - The Biden administration warned Beijing of its plans to update rules that curb shipments of AI chips and chipmaking tools to China as soon as early October, a U.S. official said, a policy decision aimed at stabilizing relations between the superpowers.

The Commerce Department, which oversees export controls, is working on an update of export restrictions first released last year. The update seeks to limit access to more chipmaking tools in line with new Dutch and Japanese rules, other sources said, and to close some loopholes in export restrictions on artificial intelligence (AI) chips.

"The PRC has been expecting an update around the one year anniversary, based on conversations with administration officials," the U.S. official said, using the abbreviation for People's Republic of China. The original rules were published Oct. 7, 2022.

U.S. officials provided the information to Chinese counterparts in recent weeks, the official said, which Reuters is reporting for the first time. The official declined to disclose details on the particular conversations.

Providing China with a heads up about the rules is part of a broader bid by the Biden administration to stabilize relations with Beijing. The outreach comes after a decision by the U.S. to shoot down a Chinese spy balloon sharply escalated tensions in February.

The Biden administration has also sent a series of high-level officials to China, including Commerce Secretary Gina Raimondo in August. Additionally, National Security Adviser Jake Sullivan held talks with Chinese Foreign Minister Wang Yi in September.

The restrictions released last October sought to prevent U.S. technology from being used to strengthen the Chinese military by cutting off its access to advanced AI chips and curbing its ability to import the most sophisticated chipmaking tools from the United States.

The Department of Commerce declined comment, while a spokesperson for the Chinese embassy in Washington had "nothing to offer," when asked for comment on the warning.

"China firmly opposes the U.S.'s overstretching of the national security concept and abuse of export control measures to wantonly hobble Chinese enterprises," said spokesperson Liu Pengyu.

Former White House official Peter Harrell stressed that he did not know if the administration had warned China about the new rules, but said, if they did, it would represent "a bit of an inflection point" for the administration as it tries to avoid sending misunderstood signals.

Treasury Secretary Janet Yellen also gave Chinese officials a warning in July about restrictions on U.S. investment in China released in August.

The Biden administration is hoping to clinch Chinese President Xi Jinping's attendance at the Asia-Pacific Economic Cooperation (APEC) summit in San Francisco in November, too, an effort which also has weighed on the timing of the upcoming export rules' release.

Officials have sought to avoid publishing them in the immediate lead-up to the summit, which they saw as potentially jeopardizing Xi's attendance, sources said. Any rules not ready for publication by early October would likely be held until after the summit to avoid antagonizing China, they noted.

“The Administration narrowed in on or near the one-year anniversary for a number of reasons – including to establish a clear cadence,” the official said.

But, the official added, the technical work needed to finalize the restrictions was not yet complete. "As of this moment, final plans are not in place," the official said on Friday.

Biden and Xi have not met in person since a G20 summit on Indonesia's resort island of Bali in November last year after Xi shunned the G20 meeting in India last month.

The United States, the Netherlands and Japan, which together control the world's top chipmaking equipment, agreed to coordinate efforts earlier this year.

The upcoming U.S. rules could hit ASML, the world's leading chip equipment maker and Netherlands' largest company, because its systems contain U.S. parts and components, as Reuters exclusively reported in June.

A spokeswoman for ASML declined comment.

   It is not unusual for the U.S. to modify proposals before clearing regulations, so the restrictions, like the timing, could change.

(Reporting by Alexandra Alper and Karen Freifeld; Editing by Chris Sanders and Anna Driver)