An executive order signed by President Joe Biden restricts U.S. venture capital and private equity investments in Chinese companies engaged in the semiconductor, quantum computing and artificial intelligence sectors – areas it said were critical to Chinese military advancement that could threaten U.S. national security. The U.S. Treasury Department said the rules would ultimately target: “acquisition of equity interests (eg, via mergers and acquisitions, private equity, venture capital, and other arrangements); greenfield investments; joint ventures; and certain debt-financing transactions that are convertible to equity”. To limit disruptions to ordinary capital flows between the two countries, the rules would not target “passive investments”, like holdings in publicly traded Chinese companies. Biden also called China a “ticking time bomb” because of its economic challenges and said the country was in trouble because of weak growth. “They have got some problems. That’s not good because when bad folks have problems, they do bad things,” Biden said at a political fundraiser in Utah.
Analysts say the restrictions have raised the odds of further damage to the relationship between the two countries but will not alter the direction towards recovery. They say both sides have taken steps in recent weeks to limit the fallout from the order that U.S. officials say has been in the works for at least a year. Da Wei, Director of the Center for International Security and Strategy at Tsinghua University, said the order was not as sweeping as expected and would not affect a planned visit to China by U.S. Commerce Secretary Gina Raimondo. But China could still retaliate in other ways.
The U.S. Treasury Department will be responsible for implementing and administering the new rules. It will accept written public comments for the next 45 days on what Treasury Secretary Janet Yellen has described as a “narrowly targeted” program. Risk consultancy Rhodium Group estimated that U.S. direct investments in China had leveled off from an average of USD14 billion a year from 2005 to 2018 to an average of USD10 billion a year from 2018 to now. Such investments fell to a 20-year low of USD8.2 billion in 2022. Rhodium’s data on U.S. venture capital in China showed investment at a 10-year low last year at USD1.3 billion, down from the peak of USD14.4 billion in 2018.
The U.S. is restricting the outbound investments by its companies and is pushing for “decoupling and severing supply chains” in the investment field under the guise of “de-risking”, which seriously deviates from the market economy and fair competition principles the U.S. has always advocated, and affects companies’ normal operation decisions, China's Ministry of Commerce (MOFCOM) said on its website. “We hope the U.S. side respects the laws of the market economy and the principles of fair competition, does not artificially impede global economic and trade exchanges and cooperation, and does not create obstacles for the recovery and growth of the world economy,” the statement said. The move's real aim is to deprive China of its right to develop and selfishly pursue U.S. supremacy at the expense of others. This is blatant economic coercion and tech bullying,” a spokesperson for the Chinese Foreign Ministry said in a statement.
Xiang Ligang, Director General of the Information Consumption Alliance, said, “The investment restrictions aimed at containing the rise of China’s high-tech sector will motivate Chinese enterprises to double down on indigenous innovation and achieve breakthroughs in key technologies.”
Hong Kong authorities have called new U.S. restrictions on investing in sensitive Chinese technologies “unreasonable” measures that will damage normal trade, urging Washington to withdraw rules that “seriously violated” market economy principles. However, the ban is not expected to have much impact on Hong Kong. According to a survey by the government’s InvestHK last year, the majority of nearly 4,000 local start-ups were involved in fintech, followed by e-commerce, supply chain management and logistics technology. If restrictions are extended to include more sectors, such as new energy and biotechnology, certain start-ups may look elsewhere for the capital and expertise they need.
The European Commission said it was in “close contact” with the White House but would not follow it right away in imposing investment restrictions. The EU instead indicated that it would make its own proposals by the end of the year. The odds that the UK would align with the U.S. ban are much larger than the EU, analysts predicted. Europe has been a major source for investment in China. As of the end of 2022, the total value of China-Europe two-way investment surpassed USD230 billion. In 2022 alone, Europe's investment in China soared 70% year-on-year to USD12.1 billion, with the vehicle industry becoming a hotspot. During the same period, Chinese investment in Europe grew 21% to USD11.1 billion.
Biden declared the move “a national emergency to deal with the threat of advancement by countries of concern in sensitive technologies and products critical to the military, intelligence, surveillance, or cyber-enabled capabilities of such countries”. China, along with its special administrative regions of Hong Kong and Macao, was noted as the only country of concern in the emergency declaration. The order also called for the creation of an outbound investment review mechanism “because our export controls don’t offer investments abroad that can help foreign adversaries or countries of concern to fuel indigenous development of national security technologies”, an administration official said.
Advanced Micro-Fabrication Equipment China (AMEC) Chairman and CEO Gerald Yin believes Washington’s escalating export and investment restrictions betray the real goal of the U.S.: keep China’s chip-making technology at least five generations behind the cutting edge. He made the comments at the China Semiconductor Equipment Annual Conference in Wuxi. He referred to the U.S. export restrictions imposed last October, which really exposed the U.S.’ true intention to limit China’s chip-making to 28-nanometer, at least five generations behind the global leading edge of 3-nm to 14-nm,” Yin said during his talk at the conference. “We can’t accept this,” he added.
China’s major chip foundries saw revenue and profit drop in the second quarter amid geopolitical uncertainties and weakening demand, but industry experts said they expect a recovery in the second half on the back of demand from the smartphone sector. Semiconductor Manufacturing International Corp (SMIC) posted revenue of USD1.56 billion in the second quarter, an 18% decrease year-on-year. Its net income also declined 21.7% to USD402.76 million during the period. Hua Hong Semiconductor reported a 1.7% year-on-year increase in revenue to USD631 million in the second quarter. However, the gross profit rate at the company, which earlier this year made the world’s second-largest initial public offering (IPO), dropped 5.9 percentage points year-on-year to 27.7%. The market, especially the smartphone and consumer electronics segments, has recovered slower than expected, said SMIC’s co-CEO Zhao Haijun, adding that he expected revenue in the second half of the year to be “better than that in the first half ”. Over 22 million smartphones were shipped in the domestic market in June, a year-on-year decrease of 20.9%, with shipments of 5G mobile phones recording a 24.8% drop year-on-year.
The overview is based on reports by the China Daily, the Global Times and the South China Morning Post.
