Chinese startups take a “major hit” due to US investment restrictions.

Chinese startups take a "major hit" due to US investment restrictions.

According to experts and investors speaking to CNN on Thursday, new restrictions on US investments in sophisticated technology in China could deepen a decline in agreements between the world’s top two economies and give a “serious blow” to Chinese companies. This news came.

 

On Wednesday, the Biden administration made the announcement that it will apply restrictions on investments made by US venture capital and private equity companies, as well as joint ventures, in artificial intelligence, quantum computing, and semiconductors developed by the Chinese government.

 

The public has the opportunity to comment on the proposed regulations for a period of forty-five days. After that, they are going to be drafted into rules, and it is anticipated that they will go into force the next year. The order of the executive branch applies to investments made not just in mainland China but also in the cities of Hong Kong and Macao.

 

DCM, a Silicon Valley venture capital company that controls assets worth more than $4 billion, said that the order would modify the “manner and structure” of its investments in one area: artificial intelligence. Even though the new measures are still taking form, DCM made the statement.

 

The firm informed CNN that it is “actively discussing with our legal advisors,” but that it does not presently invest in the other concerned industries, including semiconductors or quantum computing. “We are actively talking with our legal consultants,” the company said.

 

The company also believes that its potential future investments in artificial intelligence do not fall under categories that are restricted; nonetheless, it “will continue to apply the appropriate due care to conform and comply with the presidential order,” the company said.

DCM is one of the most active investors in Chinese businesses from the United States. It is noted for its financing of major players in consumer technology, such as the short-video platform musical.ly, which subsequently morphed into TikTok.

 

The newly imposed limits by the United States might put future cross-border transactions in jeopardy.

 

Edith Yeung, a general partner at Race Capital, a Silicon Valley company that invests in early-stage enterprises, said that “this is a big blow not just for the Chinese startup ecosystem but also to the venture capital sector.” Race Funding is a firm that focuses on providing funding to startups.

 

She said that the new decree gave the impression that the United States government was “seeking to ‘decouple'” US and Chinese venture capital, despite the fact that the administration has been certain that it is not attempting to prevent commerce with China.

Yeung, whose company primarily invests in artificial intelligence (AI), data, and corporate software in both the United States and China, said that “This has just gone too far.” Washington should not impose restrictions on the flexibility we have to make investments.

The purpose of these limits, according to the officials who announced them on Wednesday, is to prevent US money from providing assistance to China’s military. They do not want to harm China’s economy in any way.

 

“This is not an economic activity; it is a national security action.” During a call with reporters, one official said that “We appreciate the crucial role that cross-border investment flows play in the economic vibrancy of the United States.”

 

A senior US source said on Wednesday that one of the primary goals of the new restrictions is to block China’s access to “intangibles” such as connections with specialists or technological know-how. These “intangibles” are often associated with investments made by venture capitalists or private equity companies.

 

Some investors believe that harm to Chinese companies is unavoidable, which might have repercussions for markets in the United States.

 

Yeung believes that if Chinese entrepreneurs were to lose access to information and networks of experts, it would “make it more difficult for Chinese businesses to develop and compete on a global scale.”

 

She went on to say that the executive order will have “a chilling impact” on startup entrepreneurs in China and would encourage some companies to go public on the mainland of China rather than on Wall Street.

 

She said that this would, in the long run, be detrimental to the capital market in the United States.

 

A steep decline There has already been a significant reduction in the amount of US investment in China.

 

According to analysts at PitchBook named Kyle Stanford and Kaidi Gao, “Tensions between the nations had already hampered US [venture capital] investment into China, and overall activity had been decreasing for many quarters.”

 

According to the statistics provided by PitchBook, the amount of venture capital investment coming from the United States into China has decreased by almost 80 percent over the course of the last year.

 

Comparatively, the total value of Chinese acquisitions involving US venture capital investors was around $200 million during the second quarter of 2019, compared to $2.4 billion during the same time period in the previous year and $3.8 billion in 2019, before the epidemic struck. Many businesses have had to reduce their spending as a direct result of the current recession in the global economy.

The recession is much more severe in the manufacturing of chips, which is a subject that is becoming more and more contentious.

 

According to PitchBook, there were just three Chinese agreements that included US venture capital investors in this industry during the second quarter, while there were ten such deals during the same time period the previous year. After reaching a high of $853.6 million, the amount donated dropped to less than $100 million.

 

The escalation of political tensions and the imposition of trade restrictions may have scared off investors. And the limitations on investments have been in the works for quite some time.

According to Stanford and Gao, the order that Vice President Biden issued on Wednesday “came as little surprise.” This is especially true after US politicians drew attention to what they perceived as venture capital support of a “China threat.”

 

According to the sources, the presidential order “would be another impediment in US-China private sector investment.”

 

The potential boundaries of AI are now the biggest source of worry for investors. Some people are concerned that this technology might have very wide applications because of its scope.

 

Yeung made a witty remark that “almost anything might be AI these days.”

 

For US businesses, the enhanced scrutiny by Washington and by Beijing, which has also attempted to ban investment into certain sectors from foreign organizations on data security grounds, is simply another problem. Beijing has also looked to curb investment into some sectors from foreign companies on data security grounds.

 

The foreboding environment has already compelled a number of companies to revise the organizational frameworks that they have in place. Sequoia Capital made the announcement that it will be dissolving in June, including the division of its operations in the United States and China.

 

The company’s leaders said at the time that “running a decentralized global investment business had grown more complicated.”

 

The Chinese government calls it “bullying.”

China has retaliated against the United States, pledging to protect its own interests in the process.

 

On Thursday, a representative for the Chinese Ministry of Commerce said that Beijing had significant concerns about the new directive that Biden had issued and that Beijing retained the right to take steps of its own.

 

The Chinese Ministry of Foreign Affairs referred to Washington’s action as “an open act of economic coercion and scientific and technology intimidation.”

 

The problem might put additional pressure on ties.

 

In October 2017, Vice President Joe Biden said that Chinese President Xi Jinping had directly voiced concerns to him on the United States plans to increase domestic chip manufacturing. During the trip that US Commerce Secretary Gina Raimondo is scheduled to make to China this year, the most recent restrictions imposed by the administration will almost probably be tightened.

 

 

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