Five American venture capital firms have spent more than $1 billion in China’s chip industry since 2001, according to a congressional probe. This has fueled the expansion of a sector that the US government now views as a national security concern.
More than 150 Chinese companies received funding from the five firms—GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital, and Walden International—according to a report released on Thursday by the House Select Committee on the Chinese Communist Party, which included both Democratic and Republican members.
Approximately $180 million of the investments went to Chinese companies that, according to the committee, either directly or indirectly backed Beijing’s armed forces. The U.S. government has stated that certain corporations, such as Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker, supply chips for China’s military research, equipment, and weaponry.
The House committee’s report centers on investments made prior to the Biden administration enacting broad regulations meant to prevent China from receiving finance from the United States. It makes no accusations of illegality.
The Biden administration prohibited American venture capital and private equity firms from making investments in Chinese sophisticated semiconductors, artificial intelligence, and quantum computing in August. Additionally, it has placed global restrictions on the supply of sophisticated semiconductors and chip-making equipment to China, claiming that such technologies could enhance the capabilities of China’s intelligence services and armed forces.
The group, which was founded a year ago, has advocated for more tariffs on China, criticized Ford Motor and other companies for doing business with Chinese firms, and brought attention to issues with forced labor involving Chinese e-commerce sites.
The report proposed that Congress limit investments in parent firms and subsidiaries of all Chinese entities that are listed as federal “red flag” entities or that are subject to specific trade restrictions in the United States. This would include businesses that have connections to forced labor in China’s Xinjiang province or collaborate with the Chinese military. The ranking Democratic member of the committee, Representative Raja Krishnamoorthi of Illinois, stated that the federal government ought to think about enforcing regulations on other sectors of the economy, such as biotechnology and fintech.
Prior to the committee announcing its probe into private finance, Sequoia declared in June that it would rebrand its China division as HongShan and split it apart from its American operations. A few months later, GGV Capital announced that it will split off its company centered in Asia.
A request for comment from Walden was not answered. An official from GSR declined to provide a statement. GGV said that the report had complied with all relevant legislation and included a list of clarifications and revisions. Moreover, GGV is attempting to sell its interests in the three businesses covered in the report.
According to a representative for Sequoia, the company has always had procedures in place to guarantee adherence to US law and national security concerns. On December 31, the company completed its separation from HongShan.
According to a Qualcomm representative, the company’s investments accounted for less than 2 percent of the total investments covered in the report, making them modest in comparison to venture capital firms’ holdings.
Washington officials argue that China has attempted to use the private sector’s experience to modernize its military, making them view economic relationships—even with private Chinese technology companies—as worrisome.
The chairs of the committee acknowledged that a large number of these investments were made during a period when the US was pushing for increased trade with China.
“We all placed this wager on China’s assimilation into the world economy two decades prior, and it made sense,” the committee’s chairman, Wisconsin Representative Mike Gallagher, said. “It just so happened to not work out.” “Now, I just think there’s no excuse anymore,” he continued.
The 57-page report is based on interviews with senior executives at many corporations and information concerning investments that the firms gave the committee.
The committee’s findings examined a small portion of the money going to China. According to start-up funding tracker PitchBook, Chinese semiconductor businesses raised $8.7 billion in deals between 2016 and July 2023, with the participation of US investment firms. 2021 was the investment’s peak year.
For several decades, venture capital firms actively targeted worldwide expansion, with a particular focus on Asia. However, they have anticipated that investments in Chinese enterprises would come under more scrutiny ever since the Trump administration adopted a more assertive posture toward China.
An investor at the venture capital firm Kyber Knight, Linus Liang, stated, “Nobody is touching China now.”
The committee’s worries that American funding and technology will wind up in Chinese enterprises might not be allayed by breaking up investment entities with ties to China, as Sequoia and GGV did, the article said. Among its supporters are American investors in HongShan, the recently split Chinese company of Sequoia. Furthermore, the report stated that GGV Asia and HongShan could continue to invest in U.S. start-ups.
The corporation Walden International, based in California, is mostly the subject of the article. It was among the first and most significant foreign investors in the Chinese semiconductor industry. Lip-Bu Tan, a current board member of Intel and the former CEO of chip design company Cadence Design Systems, is in charge of Walden.
According to the article, Walden International collaborated with the Chinese government and state-owned enterprises in China, including a well-known military supplier, to establish a number of funds for the semiconductor industry.
It was one of the original investors and sources of funding for SMIC, which is currently bound by trade restrictions imposed by the United States due to its connections to the Chinese military.
He is recognized for providing SMIC and other businesses with capital, resources, and patents for chip design in addition to lucrative client relationships.
Although SMIC was designated as a “trusted customer” by the US government in 2007, doubts about the company’s operations have increased in Washington in more recent times. The business is now essential to China’s goals of developing a robust semiconductor industry and reducing its reliance on the US.
Tens of millions of dollars were invested in Advanced Micro-Fabrication Equipment, or AMEC, a Chinese business that manufactures the machinery required to fabricate semiconductors, by Walden and Qualcomm Ventures, the chipmaker Qualcomm’s investment arm. After the US imposed limitations on supplying China the most cutting-edge chip-making machinery, AMEC, a supplier to SMIC and other Chinese chipmakers, became essential to China’s efforts to expand its chip-making business.
The government of China provides substantial funding to its semiconductor industries. However, connections with American venture capital firms give Chinese businesses access to technology, the American and European markets, and managerial know-how. Additionally, American venture capital firms have attempted to influence American authorities and regulators in favor of Chinese enterprises that are part of their portfolio.
