The administration had considered employing a little-used national emergency law called the International Emergency Economic Powers Act of 1977 to curb prospective investments, people familiar with the plan said earlier this month.
It comes as the USA and China both prepare to slap tariffs on $34bn worth of each others' goods.
Instead, the White House wants Congress to pass legislation to bolster the Committee on Foreign Investment in the US, or CFIUS, so it can prevent Chinese companies from violating intellectual-property rights of American companies, two administration officials said, speaking to reporters Wednesday on the condition of anonymity.
President Trump on Wednesday softened proposed limits on China's right to invest in USA technology companies, the latest sign of an on-again, off-again trade war that is raising doubts about his ability to wring concessions from Beijing.
The House on Tuesday approved a bipartisan bill 400 to 2. The U.S.is planning to impose tariffs on $34 billion in Chinese goods on July 6, an amount that could reach $450 billion if China refuses to back down and retaliates with sanctions of its own.
The Senate approved changes to the way the Committee on Foreign Investment in the United States operates, which will allow the committee to block joint-venture takeovers of us companies by foreign companies.
Some lawmakers questioned Trump's less aggressive approach. "#China is strategically buying up US companies specializing in cutting edge technology".
On May 29, the White House said that new "investment restrictions and enhanced export controls will be announced by June 30" and implemented shortly thereafter.
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DeBusk said that trade tensions have driven the USA stock market down and said that Trump might be seeking a way to avoid "a potentially catastrophic" trade war with China. "This doesn't create more uncertainty", he said.
"The administration is wise to set aside rumoured plans for broad, blunt executive action that could have hurt American manufacturers and consumers", said Rep. Ed Royce, R-Calif., the chairman of the House Foreign Affairs Committee. "Using CFIUS on a case-by-case basis to try to change Chinese approaches to industrial policy would be neither efficient nor effective". "It's confused the Chinese about what the USA really wants".
"I have concluded that such (CFIUS) legislation will provide additional tools to combat the predatory investment practices that threaten our critical technology leadership, national security, and future economic prosperity", Trump said in a statement that did not specifically name China.
The government is anxious that the move means the United States will use national security concerns unfairly in order to restrict Chinese investments.
Chinese investment in the United States has declined dramatically amid heightened regulatory scrutiny.
Chinese investment in the United States has taken a big hit since Donald Trump became president.
Mnuchin told reporters that these differences had been overblown and there was unanimous backing for the approach being unveiled Wednesday when it was presented to the president for his final approval at a White House meeting the day before. He has long accused other nations of exploiting poorly negotiated trade deals and of using unfair practices to sell America far more than they buy from it.
"Mnuchin, it seems like he is prevailing on a lot of these disputes", said Steve Moore, who was a top economic adviser to Trump during the campaign.