US-China Tech Freeze Worries US Investors, Startups

People wait for buses at a bus stop near a construction site at central business district in Beijing on March 26, 2023. Jade Gao/AFP via Getty Images

The growing tensions between Washington and Beijing are posing new challenges for American small businesses and investors even as the two nations keep talking about limiting their policy misunderstanding and easing the tech barriers, according to experts.

U.S. founders and investors say that when money is scarce, the new constraints on investments in advanced technology in both nations are exacerbating a slump in deals between small- and medium-sized enterprises in the world’s top two economies.

“There is nothing bigger than the current trade tensions between the U.S. and China [for a U.S. investor], Gary Dugan, chief investment officer at the UAE-based Dalma Capital, a global alternative investment platform and an avid China investor, told The Epoch Times.

“Post the last U.S. presidential election, U.S. investors were looking forward to a far less confrontational stance on trade issues from the U.S. However, this has not come to pass.”

On Aug. 2, President Joe Biden issued an executive order restricting investments by U.S. venture capital, private equity, and joint ventures in Chinese artificial intelligence, quantum computing, and semiconductors.

The order, which expanded a previous order by former President Donald Trump, was part of the Biden administration’s broader strategy to counter communist China’s rising influence and challenge its human rights abuses, trade practices, and technological ambitions.

On the same day, the administration also expanded its review of Chinese investments, particularly those with possible military uses or implications for national security.

Responding to the U.S. restrictions with criticism, concern, and countermeasures, Beijing has retaliated against the measures by imposing sanctions on some U.S. individuals and entities, banning some U.S. companies, like Micron Technologies, from doing business in China, and launching an anti-monopoly probe into some U.S. tech firms, such as like Deloitte, Bain & Company, Capvision, and Mintz Group.

Additionally, Beijing has imposed currency controls to limit capital outflow, making it harder for Chinese investors to fund U.S. startups.

“The restrictions placed on trade are moving fast ... provides little definition to how the U.S. and China will work with each other in the future,” said Mr. Dugan. “The restrictions on [the] transfer of technology and the flow of products and services, for instance, remain very fluid and open to many interpretations.”

Investors always struggle to anticipate and deal with political conflict between countries, said Mr. Dugan, and the current tension is already creating a chilling effect for U.S. investors who want to avoid regulatory risks or sanctions.

The closed office of the Mintz Group is seen in an office building in Beijing on March 24, 2023. - Five Chinese employees at the Beijing office of U.S. due diligence firm Mintz Group have been detained by authorities, the company said on March 24. Greg Baker/AFP via Getty Images

Reduced Access to China’s Tech Market

As the world’s second-largest economy and one of the lucrative markets for emerging technologies—such as artificial intelligence, quantum computing, and biotechnology—many U.S. investors have been drawn to China’s tech sector.

According to KPMG’s Venture Pulse report for the first quarter this year, for example, venture capital (VC) investment in China totaled $7.4 billion as VC activity picked up in the second half of the quarter once the COVID-19 wave diminished.

However, the VC funding for startups in China dropped 44.8 percent year-on-year from January to April, reaching $11.6 billion compared to $21.2 billion in the same period last year.

While President Biden’s directive restricts U.S. investors’ access to China’s tech industry, Beijing’s retaliatory moves prevent U.S. firms from seeking Chinese investment or listing on Chinese stock markets for fear of being sanctioned or delisted by the U.S. government.

Chinese deals involving a U.S. venture capital investor were around $200 million in the second quarter compared to $2.4 billion in the previous year and $3.8 billion in 2019, before the pandemic hit, according to PitchBook data.

This has also limited U.S. investors’ ability to tap into China’s technological innovation and talent base, said Karan Gupta, a Silicon Valley-based serial investor and founder of AI-based startup Alice.

“It’s difficult for me to justify an investment in China under current circumstances,” Mr. Gupta told The Epoch Times. “Whether it’s business expansion or investing in China-based companies, for me, regulations, China’s economy, and the attitude of other major countries, including the U.S. and UK, and to amend China’s global role, are also the driving factors.”

Increasing Competition From China’s Rivals

Nonetheless, while practical realities such as greater regulatory scrutiny, a stalling economy, and geopolitical tensions are reasons investors and entrepreneurs are more cautious about China, competition from other markets is also prompting them to look elsewhere.

“There is a large enough global market, and other countries are willing to provide good terms—India [and] Vietnam for manufacturing, for example. Unless you have a business that must be in China, you can avoid unnecessary scrutiny and worry,” said Mr. Gupta.

Indeed, China faces increasing competition from other countries in various domains, such as economy, technology, security, and diplomacy. Besides the United States, other rivals include India, Australia, Japan, and Russia.

Especially in the South Asian region, India, which shares a long and disputed border with China, is widely seen as a strategic competitor. India also has been wary of China’s Belt and Road Initiative, which it sees as a strategic encirclement and a debt trap for its neighbors.

Over the past years, India has also aligned itself with the United States and other like-minded countries in the Quad framework, which aims to ensure a free and open Indo-Pacific. The Quadrilateral Security Dialogue, commonly known as the Quad, consists of India, the United States, Australia, and Japan.

Similarly, Japan is a significant rival of China in East Asia, with a history of antagonism and mistrust between the two countries. Japan has also expressed concern over the Chinese regime’s military modernization and aggression in the region, particularly in the Taiwan Strait and the South China Sea, and has increased security cooperation with the United States and other allies to counter China’s ascent.

Russia also has a complicated relationship with China, oscillating between being an “emerging alliance” and an “eternal rival,” according to experts. On the one hand, Russia and China have collaborated on various issues, including energy, commerce, defense, and multilateralism, and backed each other in the face of Western pressure and sanctions.

Yet Moscow and Beijing have contrasting interests and concerns in areas where they struggle for influence and resources, such as Central Asia, the Arctic, and the Middle East. Russia is also concerned about losing strategic autonomy and becoming a junior partner to China in the long run.

“The trade war between the U.S. and China is leading to the regionalization of the investment opportunities,” said Mr. Dugan.

Experts believe that President Biden’s directive and the Chinese regime’s reprisal reflect Washington and Beijing’s growing rivalry, competition, and divergence on various issues, which will likely define the future of the global startup landscape.

“I would advise startups and investors to carefully consider China before betting on that country,” said Mr. Gupta.