On August 9, 2023, Joe Biden discusses the impact of “Bidenomics” on clean energy and manufacturing at Arcosa Wind Towers in Belen, New Mexico.
On Wednesday, the Biden administration’s executive order that curtails U.S. private equity and venture capital investments in Chinese technology was announced. For tech investors who had already become hesitant about the cross-Pacific rivalry, this decision is the most unambiguous indication yet that China, then the world’ second-largest economy, is out of bounds.
Biden is focusing on investments in technologies like artificial intelligence, quantum computing, and semiconductors due to concerns that China’s progress against national security interests. This new measure is expected to be implemented next year.
The deteriorating economy and turbulent geopolitical conditions have led to a significant loss of Chinese investment by U.S. investors. According to PitchBook data, China’s private equity and venture investments have dropped to an eight-year low in 2022 from the previous year. This trend persisted into the first half of this year as well.
According to Elena McGovern, co-head of Capstone’s national security practice, many of our clients have suggested that we may be readjusting our activities in China.
Political pressure has been bipartisan: In the meantime, four U.S. venture firms sent letters to the House Select Committee on the Chinese Communist Party expressing serious concern about their investments in Chinese tech startups; and in July that same month, Sequoia Capital announced it would split its international business into three parts, with Neil Shen heading its powerful Sequena China unit.
Any technology that can enhance China’s military might or provide for its surveillance needs is of particular concern to the White House at this point.
Eric Reiner, the managing partner of Vine Ventures, a venture capital firm that supports early-stage companies in the U.S., Israel, and Latin America, stated that Beijing’s military development should not be funded with U.”
While there is a lot of concern about the potential impact of restrictions on AI, computer processors, and quantum computing, many investors and experts are optimistic that the ban will expand, making any agreement to invest in Chinese technology too risky.
Adam Hickey, a former deputy assistant attorney general for the Justice Department’s national security division and current partner at Mayer Brown, stated that it may discourage investments in those fields beyond what is officially prohibited. “Most investors want to avoid being perceived as acting against U.S. national safety interests,” he said.
Steve Sarracino, the creator of Activant Capital has offices in the U.S., Germany, and South Africa. He claimed that there is no one who invests in China during its early stages, except hedge funds that are involved in calculating political risks.
The U.S. government’s persistent hostility towards China poses its own challenges. For one, there is ample investment money in and around China that can fill the void and potentially generate significant profits. Another issue to consider is how to manage current investments.
The parent company of TikTok, the mobile video app, has received investment from major U.S. venture firms like ByteDance, which may face a ban or forced sale to continue operating as investors seek to maximize profits.