China tech further severed from US fundings after Biden ban | TechCrunch

President Joe Biden on Wednesday signed an executive order barring U.S. investments in certain tech sectors of China, confirming rumors that have been swirling for months that Washington would ramp up efforts to squeeze China’s tech industry amid growing concerns over Beijing’s military ambitions.

The order authorizes the U.S. Secretary of the Treasury to restrict U.S. investment in three critical categories of Chinese companies: semiconductors and microelectronics, quantum computing, and artificial intelligence that is critical for the military, intelligence, surveillance, or cyber-enabled capabilities as determined by the Secretary in consultation with the Secretary of Commerce and other relevant agencies.

The measure is expected to take effect next year, according to The Washington Post. It also applies to companies in Hong Kong.

“Advancements in sensitive technologies and products in these sectors will accelerate the development of advanced computational capabilities that will enable new applications that pose significant national security risks, such as the development of more sophisticated weapons systems, breaking of cryptographic codes, and other applications that could provide these countries with military advantages,” the document reads.

American venture investment firms first entered the Chinese market in the 1990s, assuming a critical role in funding the country’s burgeoning tech companies and facilitating their global expansion. But this once cordial partnership now faces mounting challenges as tensions U.S.-China tensions escalated in recent years, with both governments actively seeking to disengage their respective technology development from each other.

Who’s affected?

American investment firms have been repositioning to navigate new geopolitical complications. Sequoia Capital China, which has invested in over 1,000 companies in China including behemoths like Alibaba, ByteDance and Shein, announced in June that it would split its China arm into an independent unit.

Investors at China-focused U.S. funds told TechCrunch over the past few months that they had switched to a “wait and see” strategy for further clarification from the U.S. government. Sequoia Capital China, now called HongShan, greatly slowed its investment pace, recording just 70 investments during the four quarters between Q3 2022 and Q2 2023, compared to 180 deals from Q3 2021 to Q2 2022, according to Crunchbase.

Chinese startups are adjusting as well. Those that are targeting Western markets increasingly see the need to domicile their controlling entity in the U.S., especially if they want to raise from American investors, according to a dozen founders TechCrunch spoke to in recent months.

This is a change from an old strategy of operating through a variable interest entity or VIE structure, where Chinese firms set up an offshore entity that enables foreign investors to gain control and economic benefits from Chinese companies in industries where foreign ownership is restricted. Under this arrangement, the offshore entity holds contractual agreements with the Chinese operating company, including profit-sharing and voting rights.

This is a developing story…