The administration of US President Joe Biden last Wednesday, August 9, announced its intention to introduce restrictive measures concerning the investment of American venture capital, private companies, and joint ventures in the Chinese technology sector.
The restrictions announced by the American authorities will concern the sphere of artificial intelligence, quantum computing, and semiconductors. This de facto sanctions initiative is subject to public discussion within the next 45 days. After the expiration of this period, restrictive measures will be approved as regulations. The media reports that new rules narrowing the scale of investment cooperation between the United States and China will come into force next year. There is also information that restrictive measures will affect not only the mainland of the Asian country but also Hong Kong and Macau.
A new regulatory framework regulating the investment activities of US representatives in China is currently being formed. This means that the current configuration of the set of rules is preliminary and may be subject to certain changes, up to the cancellation of a particular measure.
DCM, a Silicon Valley venture capital company that manages investments worth more than $ 4 billion, said that the decision of the US presidential administration will change the way and structure of its financial activities in the field of artificial intelligence. The firm is currently discussing working under the new restrictions with legal consultants. The company noted that it has never invested in chips or quantum computing as part of its interaction with the Chinese side.
DCM admits that its projects may not be banned against the background of the introduction of new measures, but states that it will follow the instructions of the authorities in any case. This company is one of the most active American investors in Chinese startups. At one time, this firm supported TikTok, which was at the initial stage of existence during the period of receiving investments.
Edith Yeung, general partner of Race Capital, a Silicon Valley company that finances the activities of early-stage enterprises, says that the restrictions proposed by the Joe Biden administration will be a serious blow not only to the Chinese startup ecosystem but also to the venture capital industry as a whole. In her opinion, the proposed norms are excessive. She is convinced that Washington should not establish rules that reduce the space of freedom in the field of investment.
Edith Yeung mentioned that the officials who announced the new restrictions repeatedly spoke of their intention to stop the support of the Chinese military industry by American capital and stated that there were no plans to damage the economy of this country, but in fact, in her opinion, the consequences will be more significant and more destructive.
One of the American officials, speaking to the media on condition of anonymity, said that the new rules are a measure in the context of national security, but not an economic solution.
Another senior official referred to by journalists, without specifying his name and position, said that one of the main goals in the context of the new restrictions is to block China’s access to so-called intangible assets, including advanced technical inventions and cooperation with experts accompanying investments of venture capitalists and private companies.
Some investors, commenting on the decision of the Joe Biden administration, say that in this case, Chinese business is guaranteed to face losses. Also, in their opinion, there is a high probability that restrictive measures will have negative consequences for the US markets.
Edith Yeung says that the lack of access to expert networks and knowledge will become a serious problem for Chinese startups in terms of the possibility to innovate and the ability to compete globally. She also noted that the new regulations may encourage some firms to go public in mainland China rather than on Wall Street.
Kyle Stanford and Kaidi Gao, PitchBook analysts, say that the activity of American venture capitalists in the framework of interaction with Chinese businesses has been declining over the past few quarters amid tensions in relations between the two countries. According to them, the volume of American investment in startups from China has decreased by about 80% over the past year.
In the second quarter of this year, the volume of Chinese transactions involving American venture investors amounted to about $200 million. In 2022, this figure was equal to $2.4 billion. In 2019, the volume of such deals was $3.8 billion.
Kyle Stanford and Kaidi Gao say that the decision of the Joe Biden administration is not surprising, especially against the background of lawmakers’ statements about venture financing of the Chinese threat.
China has declared intention to defend its interests. On Thursday, August 10, a representative of the Ministry of Commerce of this country said that Beijing is concerned about the decision of the US presidential administration and reserves the right to retaliate.
The Chinese Ministry of Foreign Affairs described the restrictions by the United States as a blatant act of economic coercion and scientific and technical intimidation.
As we have reported earlier, US to Curb China Access to Cloud Services.
