The United States could target sectors preferred by technology investors in a move to limit the flow of capital to China

Renewed investment in Chinese companies by US companies may face a roadblock as Congress considers broader federal control over the flow of US capital to China and other trading rivals.

House and Senate negotiators are juggling two proposed bills to make the United States more competitive against China. One of the laws, passed by the House of Representatives earlier this year, includes provisions that would set up an interagency committee led by the Office of the Trade Representative to review investments by U.S. companies in “relevant countries,” which include China and other countries known to be foreign adversaries. It also gives the government new powers to block billions of dollars in foreign investment on national security grounds.

Last week, a bipartisan group of lawmakers released a revised draft of the bill to narrow the screening regime to target foreign investment in certain sectors critical to US supply chains — semiconductor manufacturing, critical metals and materials, pharmaceuticals and large-capacity batteries — or include “critical technologies.” and emerging” such as artificial intelligence, bio-economy and quantum computing, according to news reports and analysis from law firms.

Tighter controls on foreign investment are likely to impede the flow of private capital from the United States to China, which has focused on technology industries in recent years.

Lawmakers issued a joint statement, citing such a system as a critical tool as Congress works to put safeguards on taxpayer money and protect the nation’s supply chains.

However, opponents have criticized the proposal’s broad mandate, which appears to be more comprehensive than its predecessor in many ways. For example, it captures a wide range of financial investments as well as other advisory activities that did not fall within the scope of the previous law.

Law firm Covington & Burling said in an analysis published last week that the broad scope of the revised bill raises questions about whether the government would have the “administrative feasibility” of implementing the new review system.

Another concern is that the legislation could take over foreign entities that are not based in the country of concern but only have relationships with Chinese companies, such as joint ventures.

The proposal, along with other government activities, suggests that policymakers are pressing ahead with legislative efforts to expand oversight of investments abroad, which could create new barriers for US investors seeking to deploy capital abroad. The White House is said to be considering an executive order to limit US capital in Chinese startups and technology companies.

US appetite for Chinese investment — particularly project deals — has rebounded in the past few years, according to PitchBook data.

The data shows that US companies engaged in deals worth $44.6 billion in China last year, nearly doubling from 2019, when they were only involved in $23.1 billion in transactions.

While the final language of the legislation is still pending, growing support in Congress and the White House to implement stricter investment audits to limit technology transfers to China and strengthen control over critical supply chains in the United States could have a significant impact on US financing in China. .

American venture capital has been fairly active in the Chinese market. Last year, investment in China was $36.5 billion — up from $25.1 billion in 2020, but still below the high it reached in 2018, according to the data.

Much of that investment went to Chinese startups in artificial intelligence and biosciences, which are the industries targeted by the proposed legislation.

US venture capitalists participated in $9.8 billion in financing across 115 deals in Chinese AI companies in 2021, the highest level since 2017 in terms of total capital invested and total number of deals. Seventy-four legitimate investments worth $6.5 billion in China’s biotech sector involved at least one US investor.

US equity investors have also accelerated deal-making activity in China last year – albeit at a slower pace and on a smaller scale. In 2021, there were only 35 deals for Chinese companies with participation from US private equity firms, totaling $4.6 billion.

GGV Capital tops the list of the most active VCs in China since 2017 with 263 investments, while Warburg Pincus tops the list of the most active private equity investors with 18 deals during the same period.

Featured image by Nicolas Asfouri/Getty Images

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