American investors will soon be prevented from funnelling cash into the most advanced Chinese tech.

US President Joe Biden has signed an executive order blocking and regulating any US financial backing for advanced computer chips, quantum computing and artificial intelligence (AI) in the world’s second largest economy.

The President said that while “open investment is a cornerstone of our economic policy”, he was concerned that US investment could fund technology used “to counter United States and allied capabilities”.

In other words, Biden is worried that venture capitalists and private equity firms hungry for profit could end up funding Chinese weaponry through the backdoor.

The ban demonstrates how cutting edge technologies, particularly AI, have become the new frontline in the West’s Cold War against China.

While advances in AI have captured mainstream attention through the popularity of ChatGPT, other advanced forms of the technology have immense potential to be used for more sinister purposes, according to Alan Woodward, a computer science expert at the University of Surrey.

AI systems, nominally designed for civilian use, could find their way into weapon targeting systems, autonomous drones or advanced cyber weapons.

The technology could also be designed to “automatically find vulnerabilities” in computer software or used in “attacks like spreading disinformation,” he says.

Western governments have put in place guardrails to stop the technology being used for these purposes without permission and oversight. However, Beijing does not have the same qualms.

“China does not have the same restrictions – why would it not get built into autonomous weapons?,” Woodward says.

A lot of the concern over the military potential of AI is tied to Taiwan, where China has been ramping up its displays of aggression. On Thursday, Beijing sent navy ships and a large group of fighter jets toward Taiwan.

Owen Tedford of Beacon Policy Advisors said: “There’s this belief that the US Capitol should not be financing these advanced technologies that could threaten or change the military balance of power in the Pacific.”

It is these concerns that have prompted Washington to act. Biden is now hoping the US’s allies will follow suit.

“The administration believes that we act more effectively, we act more durably when we act alongside our allies and partners,” a White House spokesperson said on Wednesday.

Rishi Sunak will now be under pressure to enact a similar ban on British investment in Chinese AI and quantum tech.

Tedford said: “The White House is reaching out to allies to try and get them on board so that capital is not coming from Western sources.”

The US has already successfully pressured allies including Britain to expel Huawei from sensitive communication infrastructure, showing it has significant sway when it comes to China.

Robert Gardener, a director of government affairs at Hogan Lovells who previously worked at the Cabinet Office, says following the ban could in fact boost Sunak’s domestic AI ambitions.

“The government is very keen to make the UK a global tech hub and one of its five technologies of tomorrow is AI.

“Ministers would much rather see investment into the UK, and into AI in particular, rather than going overseas and not just overseas but overseas to China, which still poses threats to the stability of the UK.”

A spokesperson for the Prime Minister said: “The UK will consider these new measures closely as we continue to assess potential national security risks attached to some investments.”

Beijing, meanwhile, has branded the US ban a sign of “anti-globalisation” and said China “reserves the right to take measures” in response.

Yet while the measure has provoked anger in China, experts say it is actually quite limited.

Dan Ives, a technology analyst for Wedbush Securities, says the new US rules were “more narrow than feared”.

Tedford says Biden is trying to balance security concerns with AI’s potential to boost the economy.

“Part of the challenge and one of the delays in why it’s taken this long for even this proposal to be released is that there’s been concern within the White House about creating rules that are too broad and impact too much commercial facing use of AI,” he says.

The legislation will therefore seek to narrowly target AI systems that are primarily used for military purposes.

Some investors have already shunned China amid growing tensions in recent years. However, hundreds of millions of dollars – at least – will be at stake, Tedford says.

US investors have in recent years quietly fed money to Chinese ventures in artificial intelligence, facial recognition and quantum computing as soaring valuations offered lucrative returns.

Some investments have proved particularly controversial.

US pension funds and universities have put cash into Chinese AI companies SenseTime and Megvii. The pair are known as China’s “little dragons” of AI worth billions of dollars.

Both have developed advanced facial and image recognition software that has been used by China’s police and security services. These businesses have been blacklisted by the US for several years, and accused of being “part of the Chinese military-industrial complex”.

The companies have faced claims they have enabled mass surveillance in Xinjiang province, where China has been accused of human rights abuses against the Muslim minority. Both have issued denials.

China has been accused of developing artificial intelligence tools that can racially profile members of the Uyghur minority, identifying them in crowds and alerting authorities.

Meanwhile, Western backing for the wildly popular video app TikTok has also drawn scrutiny as governments have banned the app over data security concerns.

Some of the biggest investors in Bytedance, the owner of TikTok, are US and UK funds, including General Atlantic, Baillie Gifford and the Beijing branch of Silicon Valley investment company Sequoia. Bytedance insists TikTok does not collaborate with the Chinese Communist Party or improperly harvest user data.

Richard Windsor, an analyst at Radio Free Mobile, said most foreign investors have already been “scared away” by Beijing’s own crackdown on the technology sector.

However, even if Biden’s ban proves symbolic and the risks are low, Woodward says the political calculation is a relatively straightforward one.

“It seems foolhardy to fund something that could come back and bite you.”