A congressional investigation has determined that five U.S. venture capital firms have invested more than $1 billion in China’s semiconductor industry since 2001, fueling the growth of a sector that the U.S. government now considers a threat to national security.
The funds provided by the five companies – GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital and Walden International – went to more than 150 Chinese companies, according to the report released Thursday by Republicans and Democrats on the special committee of the House of Representatives. the Chinese Communist Party.
The investments included about $180 million going to Chinese companies that the committee said directly or indirectly supported Beijing’s military. That includes companies that the U.S. government says supply chips for China’s military research, equipment and weapons, such as Semiconductor Manufacturing International Corporation, or SMIC, China’s largest chipmaker.
The House committee report focuses on investments made before the Biden administration imposed drastic restrictions aimed at cutting off China’s access to U.S. financing. He does not allege any illegality.
In August, the Biden administration banned U.S. venture capital and private equity firms from investing in Chinese quantum computing, artificial intelligence and advanced semiconductors. He also imposed global limits on sales of advanced chips and chipmaking machinery to China, arguing that such technologies could help boost the capabilities of China’s military and spy agencies.
Since its creation a year ago, the committee has called for increased tariffs on China, targeted Ford Motor and other companies that do business with Chinese companies and highlighted labor issues forced involving Chinese commercial sites.
The report recommends that Congress curb investments in all Chinese entities subject to certain U.S. trade restrictions or on federal “red flag” lists, as well as their parent companies and subsidiaries. This would include companies that work with the Chinese military or have links to forced labor in China’s Xinjiang region. The U.S. government should also consider imposing controls on other sectors, such as biotechnology and fintech, said Rep. Raja Krishnamoorthi of Illinois, the committee’s top Democrat.
Sequoia announced in June, before the commission announced its investigation into private financing, that it would separate its China arm from its U.S. operations and rename it HongShan. A few months later, GGV Capital announced that it would spin off its Asia-focused operations.
Walden did not respond to a request for comment. A representative for GSR declined to comment. GGV provided a list of corrections and clarifications to the report and stated that it complies with all applicable laws. GGV is also trying to sell its stakes in three companies mentioned in the report.
A Sequoia spokeswoman said the company takes U.S. national security issues seriously and has always had processes in place to ensure compliance with U.S. law. The company completed its spin-off from HongShan on December 31.
A Qualcomm spokeswoman said its investments were modest compared to those of venture capital firms and represented less than 2% of the investments discussed in the report.
Officials in Washington increasingly view business ties with private Chinese technology companies as problematic, arguing that China has tried to rely on private sector expertise to modernize its military.
Committee leaders acknowledged that many of these investments were made as the United States encouraged greater economic engagement with China.
“We all made this bet 20 years ago on China’s integration into the global economy, and it made sense,” said Rep. Mike Gallagher of Wisconsin, the committee chairman. “It turns out that it failed.” He added: “Now I just think there’s no excuse.”
The 57-page report draws on information provided to the committee by companies about their investments, as well as interviews with senior executives at several companies.
The committee’s report examined only part of the funding for China. Between 2016 and July 2023, Chinese semiconductor companies raised $8.7 billion in deals that included U.S. investment firms, according to PitchBook, which tracks startup funding. This investment peaked in 2021.
Venture capital firms have pursued aggressive global expansion, particularly in Asia, for several decades. But they have known since the Trump administration took a more aggressive stance toward China that investments in Chinese companies would face increasing scrutiny.
“Nobody touches China now,” said Linus Liang, an investor at venture capital firm Kyber Knight Capital.
Separating investment entities with ties to China, as Sequoia and GGV have done, may not allay the committee’s concerns that U.S. financing and technology would end up in Chinese companies, says the report. HongShan, Sequoia’s new Chinese company, counts American investors among its backers. And HongShan and GGV’s new unit, GGV Asia, could still invest in U.S. startups, the report said.
Much of the report focuses on Walden International, a California-based company that was one of the first and most influential foreign investors in China’s chip sector. Walden is led by Lip-Bu Tan, former CEO of Cadence Design Systems, a chip design company, and current Intel board member.
Walden International has established various funds for the chip sector in partnership with the Chinese government and Chinese state-owned enterprises, including a major military supplier, according to the report.
She was one of the founding shareholders and the first source of financing for SMIC, now subject to US trade restrictions due to its ties to the Chinese military. Walden gave $52 million to SMIC over several decades, the committee found, as well as tens of millions of dollars to SMIC affiliates. Mr Tan also served on the board of directors of SMIC.
He is credited with bringing SMIC and other companies a combination of funding, tools and intellectual property for chip design, as well as profitable relationships with customers.
While the American government qualified the minimum wage a “trusted customer” in 2007, skepticism of the company’s activities has increased in Washington in recent years. Today, the company plays a key role in China’s ambitions to create a thriving chip sector and reduce its dependence on the United States.
Walden, together with Qualcomm Ventures, the investment arm of chipmaker Qualcomm, has invested tens of millions of dollars in Advanced Micro-Fabrication Equipment, or AMEC, a Chinese company that makes the machines needed to make chips . AMEC, a supplier to SMIC and other Chinese chipmakers, is key to China’s efforts to expand its chipmaking industry after the United States imposed restrictions on the sale of chipmaking machinery to China. the most advanced chips.
Chinese semiconductor companies are well funded by the country’s government. But ties to U.S. venture capital firms provide Chinese companies with management expertise as well as access to U.S. and European technology and markets. U.S. venture capital firms have also attempted to influence U.S. officials and regulators on behalf of their portfolio Chinese companies, such as TikTok.
