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Little-noticed US funding for China tech sector now draws scrutiny

'A fundamental contradiction in our China policy'

Rep. Mike Gallagher says the U.S. is placing more scrutiny on technology transfer to counter "malign" Chinese Communist Party-directed companies while also providing a "green light" to the  capitalization of many of them.
Rep. Mike Gallagher says the U.S. is placing more scrutiny on technology transfer to counter "malign" Chinese Communist Party-directed companies while also providing a "green light" to the capitalization of many of them. (Tom Williams/CQ Roll Call file photo)

Corrected 1:18 p.m. | Even as Washington takes a hard line on keeping U.S. technology and data beyond China’s reach, the federal government has thus far been slow to close another channel of technology assistance: potentially billions of dollars in U.S. investment in Chinese tech startup companies. 

Lawmakers stepped into the issue last year, using the fiscal 2023 omnibus spending bill to direct the Treasury and Commerce departments to find a mechanism to track U.S. capital flows into tech sectors in China and other countries. Lawmakers and administration officials say the move is essential to curbing China’s tech ambitions. 

“There is a fundamental contradiction in our China policy today: the U.S. government is placing increasing scrutiny on technology transfer and tightening export controls in concert with our allies to counter malign CCP-directed companies,” said Rep. Mike Gallagher, R-Wis., the chairman of the House Select Committee on the Strategic Competition Between the U.S. and the Chinese Communist Party.

“At the same time however, our government is providing a de facto green light to the unlimited capitalization of many of these companies and others like them in strategic technology sectors,” Gallagher said in an email, adding that those capital flows must be addressed. “The Select Committee will be taking a close look to both determine the extent of the problem and to build consensus around bipartisan solutions.”

The Treasury and Commerce departments are required to report to Congress on the progress on the mechanism by the end of February.

Congress last year appropriated billions of dollars to support U.S. chip manufacturing and voted to ban TikTok, a Chinese-owned video sharing app, from government-issued devices because of concern that China could be using the devices to collect data or spy on users. 

But investment money can flow to China, sometimes accompanied by knowledge transfer, expert coaching, quality control practices and other intangible benefits, without oversight. 

“I spent a decade at a venture capital firm, and both on the inbound and outbound side we ought to acknowledge that this is a real issue,” Nathaniel Fick, the ambassador for cyberspace and digital policy at the State Department, said at an event last week hosted by the German Marshall Fund. 

“That money often comes with strings attached, requiring partnerships, technology access and other things,” said Fick, a former Marine Corps officer and founder of a tech startup. “So this is a real issue. I don’t think it’s a boogeyman. And I’m glad that it’s now getting the attention that it deserves.”

The Treasury and Commerce departments didn’t respond to emails seeking comment.

The first task for researchers, lawmakers and executive branch officials is to figure out how to track and separate U.S. capital flows from other pools of capital that go to startups in China. 

From 2015 to 2021, at least $40.2 billion, or about 37 percent, of the $110 billion in capital raised by Chinese artificial intelligence companies involved U.S. investors, according to a report released last week by the Center for Security and Emerging Technology at Georgetown University’s Walsh School of Foreign Service.

But the data, collected from Crunchbase, a company that tracks startup funding, doesn’t clearly spell out how much money came from U.S. investors specifically, said Emily Weinstein and Ngor Luong, the authors of the report. 

As is typical with startup funding, investors from multiple countries including the U.S., Germany, and South Korea, for example, could be involved in one transaction to fund a startup in China and that would be flagged under U.S. funding, Weinstein and Luong said. 

“It’s really hard to know exactly how much is coming from the United States,” Luong said. 

Trying to follow the money

The Treasury Department could ask U.S. investors to notify the department of investment activities in specific sectors and countries, similar to the way it tracks inbound capital flows as part of the Committee on Foreign Investment in the United States, or the CFIUS process, Weinstein said. 

The Commerce Department also could require U.S. investors not to pump money into Chinese companies on the U.S. entity list — a list of foreign companies and individuals subject to licensing requirements or export control restrictions — Weinstein and Luong wrote in their report.

If the U.S. were to shut off the tap on capital flowing to China, Chinese companies would still be able to raise capital, but would likely suffer from being deprived of the intangible knowledge that comes from U.S. venture capital firms, Weinstein said. 

GGV Capital, identified by Weinstein and Luong as “most active in financing Chinese AI companies” from 2015 to 2021, held “19 master classes on topics such as finance, talent, strategy, organizational structure, sales, and more” as part of its mentorship program in China, according to the report. 

GGV had a total of 43 investment transactions involving Chinese artificial intelligence companies from 2015 to 2021, according to the report. GGV, which has offices in Menlo Park, Calif., and New York City, as well as in Singapore, Shanghai and Beijing, didn’t respond to a voicemail seeking comment. 

Tony Samp, a senior policy adviser at the law firm of DLA Piper in Washington, said any U.S. effort to screen and restrict capital flows to China would need to be in collaboration with allies to be effective.

“This administration has made a priority to date to take these actions in concert with its allies,” Samp said. “So if it comes to sanctions or any outbound kind of review processes like this, it would not be a surprise to me if they’re coordinating and discussing how to take a united front on this approach.” 

The administration also is trying to structure any restrictions on capital flows to China in a way that doesn’t affect domestic industries that depend on Chinese manufacturing, Samp said. 

The White House has said it’s drawing up plans to address U.S. outbound investment in key countries, including China, Russia, Cuba, Iran and Venezuela. 

“We are making progress in formulating an approach to address outbound investments in sensitive technologies, particularly investments that would not be captured by export controls and could enhance the technological capabilities of our competitors in the most sensitive areas,” White House national security adviser Jake Sullivan said last year after lawmakers of both parties urged the administration to do so. 

Led by Sens. Bob Casey, D-Pa., and John Cornyn, R-Texas, lawmakers from both chambers asked the White House last September to restrict capital flows to China, Russia and others. 

“As deliberations continue in Congress, we urge your Administration to move forward with executive action — which can then be bolstered by statutory provisions — to safeguard our national security and supply chain resiliency on outbound investments to foreign adversaries,” the lawmakers wrote in a  letter. 

Casey and Cornyn had proposed legislation that would have authorized the president to “suspend or prohibit transactions that pose an unacceptable risk to national critical capabilities.” 

Companion legislation  in the House was backed by Rep. Rosa DeLauro, D-Conn. 

The House passed it as part of a separate competition measure, but it did not pass in the Senate.

That legislation would have affected not only outbound investment but also transactions by U.S. companies offshoring manufacturing, research, design or development of components in industries including energy, medical equipment, communications, defense, transportation, robotics, artificial intelligence and semiconductors. 

The U.S. Chamber of Commerce opposed the legislation, saying that it was too broad and would create a “compliance burden” on small and medium-sized companies as well as complicate collaboration with allies and other companies. 

“Keeping this scheme focused on the crown jewels of U.S. tech is imperative,” John Murphy, senior vice president for international policy at the chamber, said in an email. “A too-broad approach would stress limited U.S. government resources and could punish U.S. workers and companies.”  

This report was corrected to reflect the outcome of legislation proposed by Rep. Rosa DeLauro.

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