(Bloomberg) -- Congressional negotiators on Tuesday were poised to abandon plans to use the annual defense policy bill to tighten controls on US investment in Chinese technology, according to people familiar with the discussions.

House Financial Services Chairman Patrick McHenry is effectively blocking a measure that would require firms to notify the government about certain investments in China and other countries of concern, according to the people. The amendment aligns with an executive order by President Joe Biden to curb spending on high-tech sectors in the world’s second-largest economy. 

The Senate overwhelmingly approved the measure as part of its version of the defense bill earlier this year, but it faces strong opposition in the House from McHenry, who has long opposed broad investment restrictions in favor of an approach that targets individual companies. The North Carolina Republican not only holds an influential gavel but also a seat on the conference committee that’s forging the final version of the defense bill. 

“I wouldn’t say it’s blocked yet, but Chairman McHenry, who is a conferee, has a very firm position, and I support that position,” said Representative Andy Barr, a Kentucky Republican who has authored a separate bill that sanctions individual Chinese companies.

House Foreign Affairs Committee Chairman Michael McCaul said that he continues to work with McHenry in good faith but that the necessary vehicle might be his own standalone outbound investment bill with Representative Gregory Meeks, the top Democrat on the panel. 

A spokesperson for McHenry, who has backed Barr’s sanctions-based approach, did not immediately respond to comment. 

Despite some Republicans describing US capital outflows to the Asian country as the most important China-related issue facing Congress, internal GOP divisions will likely leave the Biden administration to act alone. The likely failure of outbound investment restrictions in National Defense Authorization Act negotiations would also mark a win for financial industry lobbyists who opposed the White House’s measure earlier this year. 

“It would be a bad look for House Republicans to do nothing, or have a construct that’s weaker than the Biden executive order,” Representative Mike Gallagher, the Wisconsin Republican who leads the House Select Committee on China, said in an interview. “We can’t keep ping-ponging back and forth from different executive orders — that creates chaos, and we have to legislate a solution.”

Unless McHenry changes his tune or is overruled by House Speaker Mike Johnson, there’s likely no path forward for the measure in this Congress, leaving the Biden administration on its own to set the country’s policy on capital flows to China. The president’s executive order from August is likely to take effect next year. A spokesperson for Johnson did not respond to a request for comment on Tuesday night.

McHenry’s holdup also puts other financial services planks in the defense bill at risk, including a Senate-passed measure targeting fentanyl that’s a key priority for McCaul. That’s because he wants to see his version of a bill regulating crypto, an issue that has long put the House and Senate at odds. 

“He basically said, ‘if I don’t get my crypto bill in there, I’m not going to agree to this fentanyl bill,’” McCaul said of McHenry. 

McHenry’s opposition to the outbound investment measure, on the other hand, is more philosophical than tactical, McCaul said. 

In a letter to Treasury Secretary Janet Yellen after Biden announced his executive order, McHenry said that it was “unclear why the administration believes that prohibiting know-how solely linked to investments would be more effective than comprehensively using export controls or sanctions.” 

Yet lawmakers like Democratic Senator Bob Casey of Pennsylvania, who sponsored the Senate version with Republican Senator John Cornyn of Texas, say that McHenry’s method fails to address the root problem of China’s technological advancement. 

“You might sanction one company and then another pops up over here,” Casey said in an interview earlier this month, describing sanctions as a game of whack-a-mole. “Whereas by virtue of focusing on sectors, you’re really disabling their ability to continue to benefit from our innovation, our know-how, our investment — to our detriment.” 

McCaul had earlier floated combining the McHenry-backed sanctions proposal with a stronger version of the Senate amendment that actually restricts outbound investment, rather than just requiring notification. His bill with Meeks, which will come before the committee Wednesday, goes beyond the Senate-passed notification amendment to actually restrict investment.

--With assistance from Steven T. Dennis and Erik Wasson.

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