By Kate O'Keeffe and Eliot Brown
Tighter national security reviews have curbed Chinese
deal-making in the U.S., but a new study shows China is pouring
money into cutting-edge American technologies at a record pace this
year through loosely regulated venture capital investments.
Chinese foreign-direct investment into the U.S., made through
deals such as acquisitions, fell into negative territory during the
first five months of the year, according to data that takes asset
sales into account from the Rhodium Group, a New York consulting
firm.
Yet the figures belie China's sustained interest in U.S.
technology, which it is continuing to target through relatively
unrestricted investments in startups in Silicon Valley and
elsewhere, Rhodium said in a new report reviewed by The Wall Street
Journal.
The report's findings could give fresh momentum to national
security hawks who have singled out Chinese investment as posing
disproportionate risks to the U.S. because the entities may be
directed and subsidized by the government of China, an economic and
military rival.
Over the period from January to May 2018, Chinese venture
capital investment in the U.S. had already reached nearly $2.4
billion, which was its previous full-year record set in 2015,
according to Rhodium's analysis.
From 2000 through May 2018, Rhodium found more than 1,300
funding rounds of U.S. startups with at least one
Chinese-controlled investor, representing an estimated $11 billion
in Chinese investment. Around three-quarters of those transactions
have occurred since 2014, the report by Thilo Hanemann, Adam
Lysenko and Daniel Rosen, says.
The estimates reflect some larger deals recently, as the total
number of deals involving Chinese investors is down slightly from
2016 and 2017.
Venture capital is defined by investments targeting startups
with big potential that require large amounts of money in early
days. It typically involves groups of investors that each take
small stakes and gradually put in more money as the company
grows.
Chinese investors targeting startups have historically focused
their investments in the information and communications technology
sectors as well as the health, pharmaceuticals and biotechnology
sectors, Rhodium found. They are also targeting technologies such
as 3-D printing, robotics and artificial intelligence, and recently
have plowed money into companies such as Grail, a Silicon Valley
cancer detection startup, the report said.
The new data on venture investing, which is notoriously hard to
track given complex legal structures and limited disclosure
requirements, comes amid an array of potential actions by the U.S.
government to further regulate foreign tech investing.
The White House in June was close to imposing a set of tough new
restrictions on Chinese investments in the U.S., including through
venture capital funds, but backed away at the last minute, saying
it would instead throw its weight behind proposed Congressional
legislation with similar objectives.
Lawmakers are putting the finishing touches on that legislation
to curb a range of Chinese investment by strengthening the
Committee on Foreign Investment in the U.S.
The interagency committee, known as CFIUS, advises the president
on when to block foreign deals on national-security grounds.
While CFIUS has traditionally focused on foreign takeovers, the
new legislation would strengthen the committee's authority to
review minority investments from foreign entities, including
venture capital funds, in "critical technology."
"The Chinese are aggressive, well-coordinated, and creative in
finding ways to exploit our system," said Rep. Robert Pittenger
(R., N.C.), who introduced the bill alongside Senate Majority Whip
John Cornyn of Texas.
"Whether it be through cyberattacks, espionage, or by
obfuscating government involvement in investment structures -- they
will continue their attempts to vacuum up our military and
intelligence technological capabilities," he said in a Sunday
statement urging the U.S. to "remain vigilant and flexible as we
confront these asymmetrical threats."
U.S. venture capital investors worry that could lead to slower
deals, or could spur startups to avoid some foreign investors.
"A lot of behavior is going to shift in this new world," said
Jeff Farrah, general counsel at the National Venture Capital
Association, a venture capital trade group.
The stakes are high for Chinese startup investors because
"there's really no substitute for Silicon Valley globally," said
Mr. Hanemann in an interview.
For example, as tensions have increased between the U.S. and
China, Chinese investors have instead targeted Europe for deals,
with newly announced Chinese mergers and acquisitions in Europe
reaching $22 billion in the first six months of 2018 versus just
$2.5 billion in North America, according to another new report by
Rhodium and law firm Baker McKenzie. But Chinese investors don't
have the same alternative for investments in foreign high-tech
startups.
Some of the most active Chinese investors in the U.S. have been
tech giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd.,
which in recent years have showered the startup sector with dozens
of investments, including video game makers, a cellphone developer
and multiple autonomous car companies. An Alibaba spokesman
declined to comment, as did a spokesman for Tencent.
Major questions remain regarding which types of startups would
be affected by the proposed CFIUS legislation, as well as which
type of investors. The bill is leaving the process of defining what
constitutes a "critical technology" to a lengthy regulation-writing
process that would take place after the legislation became law.
Interpreting the definition of critical technology as narrowly
as possible, Rhodium estimates it's possible that as few as 15% of
Chinese venture deals could come under CFIUS review under the new
law. But, if a wider approach is taken, around three quarters of
such deals could fall under CFIUS's expanded purview, the report
says.
A 2017 research paper by a division of the Department of Defense
may provide some clues. The report, which has been influential in
Washington, identified numerous areas hot in Silicon Valley
including artificial intelligence, autonomous driving and virtual
and augmented reality.
Many prominent, highly-valued companies in those areas have
taken Chinese money, the report noted. Among them are Magic Leap
Inc., a Florida-based "augmented reality" company that has for
years been developing a headset intended to mix digital images with
the physical world. The company, valued at about $6 billion, has
raised more than $2 billion, including more than $400 million from
Alibaba. Magic Leap declined to comment.
Another, Zoox, is working to build its own self-driving car and
self-driving software out of its offices in Silicon Valley. The
company, which has multiple Chinese investors and has raised about
$360 million, declined to comment.
Write to Kate O'Keeffe at kathryn.okeeffe@wsj.com and Eliot
Brown at eliot.brown@wsj.com
(END) Dow Jones Newswires
July 16, 2018 08:15 ET (12:15 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.