US President Joe Biden delivered a speech on the impact of “Bidenomics” on clean energy and manufacturing at Arcosa Wind Towers in Belen, New Mexico, on August 9, 2023. This event marked a significant development in the Biden administration’s efforts to restrict private equity and venture capital investments in Chinese technology.
The executive order signed by President Biden is a clear signal to US tech investors that the world’s second-largest economy is now off-limits. The order specifically targets investments in technologies such as semiconductors, quantum computing, and artificial intelligence, citing concerns about China’s advancements in these areas posing a threat to US national security. It is expected to take effect next year.
US investors had already been withdrawing from China due to a combination of economic decline and geopolitical tensions. PitchBook data shows that combined private equity and venture investments in China reached an eight-year low in 2022, and this trend continued into the first half of this year.
The implementation of restrictions on capital outflows from the US and investment decisions is seen as a new era by industry professionals. Elena McGovern, co-head of the national security practice at Capstone, a private equity advisory firm, notes that this is the first time the US government has imposed such restrictions.
Political pressure surrounding Chinese tech investments has been bipartisan. The House Select Committee on the Chinese Communist Party expressed “serious concern” about four US venture firms’ investments in Chinese tech startups. In response, Sequoia Capital, a renowned VC firm, split its international business into three parts, with a particular focus on Sequoia China.
The White House is particularly concerned about any technology that could enhance China’s military capabilities or surveillance activities. Ensuring that US money is not used to finance Beijing’s military development is a priority for Eric Reiner, managing partner at Vine Ventures, an early-stage US, Israel, and Latin America-focused investment firm.
Although the executive order highlights concerns about AI, computer processors, and quantum computing, investors and experts anticipate a widening ban, making any deal involving Chinese technology too risky. Acting against US national security interests is something most investors aim to avoid.
Steve Sarracino, founder of Activant Capital, points out that very few US investors are engaged in early-stage China investments. Hedge funds, which specialize in calculating geopolitical risks, may be an exception. However, the US government’s adversarial approach to China carries its own risks, including the potential loss of investment opportunities and challenges related to existing investments.
The example of ByteDance, the parent company of TikTok, illustrates these challenges. ByteDance scrapped plans for a US listing in 2021 due to security concerns, and the IPO markets for tech companies remain largely closed. The future realization of gains for ByteDance investors remains uncertain.
Additionally, there are concerns that US firms may face disadvantages in finding and accessing deals if US-China relations improve. Rebuilding trust between the two countries will likely be a significant obstacle.
The question arises whether the executive order itself is necessary or if the focus should be on securing resources and incentivizing China not to engage in espionage activities targeting important and proprietary technology.
Overall, the Biden administration’s executive order signifies a turning point for US investors and their involvement in Chinese technology. The restrictions aim to protect US national security interests, but they also raise challenges and uncertainties for both investors and the US-China relationship.
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