In the latest internal debate between administration officials on trade with China, President Trump sided Treasury Secretary Steven Mnuchin, left.
Forgoing a broader crackdown, Trump made a decision to go with a less harsh method to curb the investments: He will expand the use of the Committee on Foreign Investment in the United States to restrict Chinese investments.
The administration is expected to urge Congress to finalize legislation modernizing a law that allows the government to review foreign investments for national security concerns, according to a person familiar with the plans who spoke under condition of anonymity and was not authorized to speak publicly.
CFIUS has already been more aggressive under Trump, especially on China.
"The market took that as a sign that the hardline approach to China has not waned", said Quincy Krosby, chief market strategist at Prudential Financial.
He recently intervened to save Chinese telecom company ZTE from harsh penalties for violating USA sanctions on trading with Iran and North Korea, tweeting that he feared "too many jobs in China" would be lost. "And we believe it will affect the competitiveness of the United States".
"I have no idea whether it will be that high [referring to the Atlanta Fed forecast], but a year ago people were laughing when we talked about 3 percent GDP", he said.
While Wednesday's statement from the president does not explicitly mention China, reports indicated that Trump was considering much harsher measures to specifically block Chinese investment as part of the ongoing fight over Chinese theft of American intellectual property.
After days of declines and increased volatility amid fears of a worsening trade war, USA stocks rallied, with the benchmark Dow Jones Industrial Average up 0.9 per cent shortly after 1400 GMT, echoing the more optimistic sentiment in European markets. The House bill would include on that list countries under military end-use export controls like China, Russia and Venezuela, under USA arms embargoes, or nations listed by the State Department as state sponsors of terrorism as being of special concern. "Like Goldilocks, the policy is either too hot or it's too cold". "This doesn't create more uncertainty", he said.
The White House signaled in May that it would adopt restrictions on Chinese investment in "industrially significant technology". "One week he's pulled one direction, the next, the opposite", said Senate Minority Leader Charles E. Schumer (D-N.Y.).
"At the end of the day, all the president's advisers were 100 per cent unanimous when we sat down with the president", Mnuchin said. Trump has used the tool more frequently than past administrations. The Chinese don't want to play by the rules.
The administration's move, after weeks of escalating tensions between the world's two largest economies, was likely to be viewed as a conciliatory effort to lessen the risks of a full-blown trade war. That's a healthy process. Marco Rubio (R-Fla.) wrote on Twitter.
On Wednesday Trump backed away from a threat to directly target Chinese investors as part of an effort to prevent the acquisition of advanced technologies that threatened United States national security.
Through this review, United States will assess its export controls and make any modifications that may be needed to strengthen them to defend national security and technological leadership.
"I have concluded that such legislation will provide additional tools to combat the predatory investment practices that threaten our critical technology leadership, national security, and future economic prosperity", Mr Trump said in a statement. -China trade conflict, got an early lift from Trump's announcement.
But instead of bucking Trump publicly, Mnuchin quietly worked to defend his Treasury turf while remaining deferential to the president.
Mnuchin told reporters that the differences among Trump's advisers had been overblown. "Nothing's worked", said Carlos Gutierrez, chair of Albright Stonebridge Group and a Commerce secretary under President George W. Bush.
"Up until now, it hasn't worked".