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US to potentially limit capital flow to China targeting tech investors’ preferred sectors

US firms' renewed investment in Chinese companies may face a stumbling block as Congress reportedly considers imposing broader federal scrutiny of US capital flowing into China and other commercial competitors. According to reports, lawmakers released a revised draft of the bill last week that focuses on the screening process to target outbound investments in specific industries crucial to US supply chains, such as semiconductor manufacturing, critical minerals and materials, pharmaceuticals, and large capacity batteries, or involve "critical and emerging technologies" like AI, bioeconomy, and quantum computing.

The flow of private finance from the US to China, which has focused on technology industries in recent years, will likely be curbed by stricter regulations on foreign investments said reports. The US Congress is reportedly working on establishing safeguards on public monies as well as to protect the nation's supply chains.

According to a study released last week by the law firm Covington & Burling, the updated bill's expansive reach raises concerns about whether the government would have "the administrative feasibility" to put the new review regime in place.

Reports indicate another issue where the legislation may target foreign entities that are not based in the target country but simply have relationships with Chinese companies, such as joint ventures.

Along with other governmental activities, the proposal indicates that policymakers are pressing ahead with legislative efforts to expand oversight of foreign investments, which would create new barriers for US investors seeking to deploy capital abroad. The White House is considering issuing an executive order to limit US investment in Chinese startups and technology firms. Studies from data show that US firms participated in US $44.6 billion transactions in China in 2021, nearly doubling from the $23.1 billion in 2019.
American venture capitalists (VC) have also been equitably active in the Chinese market. According to the data, they participated in $36.5 billion in investments into China in 2021, significantly higher than $25.1 billion in 2020. A large portion of those investments went to Chinese AI and biosciences startups, which are the industries targeted by the proposed legislation.

In 2021, US VCs invested $9.8 billion across 115 deals in Chinese AI businesses, the highest level since 2017 in terms of total capital invested and total deal count. At least one US investor was involved in the seventy-four venture investments totaling $6.5 billion in China's biotech sector.

Reports also indicate that US private equity investors, although at a slower pace and smaller scale, also increased dealmaking activity in China in 2021, with thirty-five deals totaling $4.6 billion for Chinese companies.

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