The Biden administration signed an order prohibiting US venture capital and private equity firms from investing in the advanced technology sector in China. This will halt the development of semiconductors, quantum computers, microelectronics, and specific artificial intelligence tools for the time being. The White House has accused Beijing of using such key technologies to boost its military capacities. This is the latest blow to the already tense relationship between the world’s two largest economies.
The Treasury Department released a statement that the Biden Administration is focused on securing the national interests of America by taking necessary measures to protect certain technologies that are crucial in the next generation of military innovation. As of now, the order is narrowly targeted action to aid the current export restrictions.
This move has definitely caused an immense rise in tensions since the two nations opened a medium of dialogue back when Richard M. Nixon was the President of the United States. Earlier, a chain of export restrictions on important technologies to China had sparked a reaction from Beijing. China retaliated by banning the supply of gallium and germanium, which are important for chip production, directly hitting on the military needs.
United States President Joe Biden has taken steps to normalise tensions between the two nations since the shooting down of an accused spy balloon that invaded American airspace. Recently, State Secretary Antony J. Blinken, Treasury Secretary Janet Yellen, and other government officials went on a Beijing visit to negotiate trade talks.
Liu Pengyu, spokesman for the Chinese embassy, said that the latest restriction would severely impact the operations of Chinese and American companies and investors. This move will reduce collaboration between the two nations and also reduce the confidence of the international community in the business regulations of the United States.
DCM, a United States-based venture capital firm with an AUM of $4 billion, said that the order would require a drastic change in the manner and structure of its investment in artificial intelligence. They don’t have an investment in chips or quantum computing, which partially reduces legal accountability. They are active investors in Chinese startups and are famous for their investment in the short video-sharing platform TikTok, at its nascent stage when it was named musical.ly.
Edith Yeung, general partner at Race Capital, a venture capital that invests in early-stage startups, said that this move is not only going to impact the Chinese startup ecosystem but also the venture capital industry as a whole. Yeung, who primarily invests in AI, data, and enterprise software in both countries, said that Washington should not try to curb the freedom of investing, and in the end, it is the United States capital market that will be negatively impacted in the longer term.
Capital pullback
According to data from PitchBook, United States venture capital investment in China has drastically fallen to 80% in the last two years. In 2019, venture capital deals were recorded for $3.8 billion, and last year, it fell to $2.4 billion, and in the second quarter of this year, it amounted to $200 million. The global economic downturn is a major cause of investment firms going risk averse.
The chipmaking sector will be one of the worst sectors. In the second quarter, the United States venture capital investor made only three deals in the chipmaking sector amounting to $100 million, whereas the same time the previous year recorded 10 deals worth $853.6 million.
Investors were already grappled amidst the rising diplomatic strain and trade controls, and this investment ban comes as a bottleneck over bottleneck. The increased control from both Washington and Beijing on investment in specific sectors owing to national security has become another hindrance in the business operations and development of AI.
The order faced no objection from the opposition as countering China with harsher methods was included in the bipartisan agreement. But, it faced criticism from the business community. Experts believe further strain on economic activity could broaden the gap between the two gigantic economies.
Chinese investment control
Beijing has restricted all kinds of investment beyond its borders, not just the United States. Chinese technology policy is quite different from that of America. They have restricted overseas low-tech investments like real estate or soccer clubs and encouraged the purchase of tech businesses that can offer geopolitical leverage in some or the other way in sectors like aircraft manufacturing, heavy industries, and artificial intelligence.
Chinese President Xi Jinping has created a troublesome environment in the country for businesses which has made investors and VC firms more cautious. Companies like Mitz Group, which assesses investment risk, are being investigated and raided. An anti-espionage bill has been passed that brings even domestic businesses under the umbrella of authorities to be investigated on charges of spying.