The White House is preparing sanctions on Chinese individuals and companies as it tries to pressure Beijing to stop its alleged cyber theft of commercial and economic information from US organisations.
Three people familiar with the situation said the White House had created sanctions to tackle what President Barack Obama sees as a growing threat to US economic and security interests.
Chinese President Xi Jinping will visit Washington in September on his first state visit to the US. It is unclear whether the White House will unveil the sanctions before his visit, or wait until the Chinese leader has returned home.
The move comes as the US grows increasingly frustrated at what it sees as continuing Chinese efforts to steal commercial secrets. Mr Obama signed an executive order in April declaring a national emergency over cyber attacks, which "constitute an unusual and extraordinary threat" to the US.
One official said the US was pursuing a strategy that included diplomacy, trade tools, law enforcement and "imposing sanctions on individuals or entities that engage in certain significant, malicious cyber-enabled activities".
Jim Lewis, a cyber expert at the Center for Strategic & International Studies, said the decision to punish China with sanctions reflected a new consensus within the Obama administration that previous measures, such as the indictment of Chinese military officers suspected of hacking, were ineffective.
Under the plan, which was reported by the Washington Post, the US will target Chinese people and entities involved in stealing commercial secrets as opposed to non-economic spying. But two people familiar with the matter said the trigger was the attack on the Office of Personnel Management in which the personal information of 25m government employees was stolen.
"Frustration has been growing for years about cyber economic espionage and then the scale of the OPM attack was the straw that broke the camel's back," said a former senior administration official.
While the White House has not publicly named China as the culprit, privately officials say that China conducted the attack to obtain information that would help identify and recruit spies in the US.
The LA Times reported on Monday that US officials believe China and Russia are using information obtained from attacks on government and private sector targets to create databases that help them identify US intelligence agents, and select possible targets they can blackmail into becoming spies. The US government is examining data obtained from the hacking of Ashley Madison, the adultery website, to see if any government employees could be subject to blackmail.
"Modern analytics allow China and Russia to mine data and profile individuals the way companies like Google can," said another former senior administration official.
Mr Lewis said US tech companies, which had urged restraint, increasingly wanted the White House to act because they felt China was engaging in actions that were impacting their commercial activities.
Proponents of announcing the sanctions before the Xi visit argue that such a tough stance would make it clear to the world that the US would no longer accept the level of commercial espionage that it claims is occurring.
The FBI recently blamed China for a 53 per cent rise in economic espionage cases. This year the US charged three professors from Tianjin University and three other Chinese citizens with stealing technology. In 2014 the US indicted five Chinese military officers over cyber-related economic espionage.
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The sanctions, the first under the executive order, are aimed at commercial espionage which the US argues is indefensible, as opposed to traditional espionage in which all countries, including America, engage.
However, Chinese officials view that argument as semantic, arguing that for a poorer country such as China, economic secrets translate directly to national security.
Yorgen Edholm, chief executive of Accellion, a private cloud company, described the step to impose sanctions as "extraordinary", and said he was impressed that Mr Obama was taking cyber security seriously.
"I thought it would take a year or two and continue to get worse before [he spoke about sanctions], but the fact that it is happening now . . . is redefining how everybody should look at this," he said.
—Additional reporting by Hannah Kuchler