Outbound investment rule adds biotech as China threatens retaliation

Washington's new outbound investment rule is formally out for comment, and China is already pushing back. The Treasury Department's proposal, released on Oct. 22 and published in the Federal Register on Monday, Oct. 26, would expand curbs on U.S. money flowing into Chinese technology and add biotechnology to the list for the first time.

What happened

The draft implements the Comprehensive Outbound Investment National Security Act, passed as part of the fiscal 2026 defense bill. The law covers five sectors: semiconductors and microelectronics, artificial intelligence, quantum information, high-performance computing and hypersonic systems. It lets the Treasury Secretary add technologies through rulemaking, and Treasury has used that power to add biotech, according to its press release.

Fierce Biotech reported that the draft classes "pharmaceutical compounds" as a prohibited technology, a broad definition that spans small molecules, vaccines, cell and gene therapies and antibodies. Equity stakes, certain convertible debt, joint ventures, greenfield investments and some limited-partner commitments would be covered, while ordinary licensing deals in which Western drugmakers pay upfront fees, milestones and royalties for rights to Chinese drugs would not.

Over the weekend, China's Commerce Ministry said it "firmly opposes" the plan, calling it discriminatory and "a typical example of an overly broad application of national security concerns," and said China reserves the right to take corresponding measures, Bloomberg reported, as cited by Octa. The Australian dollar, often traded as a proxy for China, slipped 0.09% to 0.7028 after the statement.

Why it matters

For investors, the outbound investment rule draws a line through the China biotech boom. Licensing deals such as Bristol Myers Squibb's potential $15.2 billion agreement with Hengrui would survive. But a structure like Pfizer's $100 million equity investment in 3SBio alongside a licensing deal would be prohibited, Fierce said, and U.S. venture funds would be shut out of Chinese biotech equity. Only transactions completed before the law took effect on Dec. 18, 2025 are exempt. The draft keeps the two tiers of the existing program, with some deals banned outright and others allowed only if they are reported to Treasury, according to the Federal Register text.

Grey areas remain. Treasury chose not to define "joint venture," which leaves cost-sharing partnerships such as Pfizer's $10.5 billion collaboration with Innovent in doubt. Biotechnology Innovation Organization chief John Crowley warned that "We cannot restrict our way to success." Bristol Myers, one of the drugmakers with China licensing exposure, has also been backing AI drug discovery at home, as in Pathos AI's funding round.

The dispute adds to the economic strains we flagged in China's third-quarter GDP report, and any retaliation could hit U.S. companies operating there.

What's next

Comments are due by Dec. 7, 2026, and Treasury has asked specifically whether "pharmaceutical compounds" should be narrowed to advanced or frontier technologies. Expect drugmakers and venture firms to lobby hard on that point before a final outbound investment rule is issued. The proposal is described in Treasury's announcement.