Investment Firms Step Away from Chinese Tech Companies After Scrutiny

WASHINGTON – For years, US venture capital firms have invested in Chinese technology companies linked to China’s military and persecution of the Uyghur people. Now, the recent glare of the spotlight from Congress and declining public opinion of China has prompted these firms to step back from involvement in the country.

A bipartisan investigation released last month, co-sponsored by Reps. Mike Gallagher (R-WI) and Raja Krishnamoorthi (D-IL), alleges that several prominent Silicon Valley firms invested at least $3 billion over the last 20 years in Chinese companies. The report contends that these firms contributed to China’s military and surveillance of the Uyghur people, a predominantly Muslim ethnic group native to Northwest China.

The venture capital firms cited – Sequoia Capital China, Walden International, Qualcomm Ventures, GSR Ventures and GGV Capital – invested in China’s AI and semiconductor sectors. The list includes $1.9 billion in AI companies, and over $1.2 billion in 150 semiconductor companies – a “dual-use” technology that is used for both civilian and military purposes. Several of the companies are blacklisted by the US government.

“We need to understand that a dollar given to a Chinese AI company, semiconductor company, or any other advanced dual-use technology company is a dollar that can be given to support the CCP [Chinese Communist Party] and the PLA [People’s Liberation Army],” Rep. Gallagher said in a statement to the Medill News Service. “We need to cut off the flow of funds. We can't afford to keep funding our own destruction.”

In the report, the lawmakers warned that because the committee examined only five venture capital firms, the investigation greatly understates the total US investment in China’s AI and semiconductor sectors. According to the Office of the United States Trade Representative, the total US foreign direct investment in China was $126.1 billion in 2022.

Reps. Gallagher and Krishnamoorthi, who lead the House Select Committee on the Chinese Communist Party, launched the investigation in July 2023. The lawmakers sent letters to venture capital firms requesting information about the firms’ investments in Chinese entities.

Taking aim at artificial intelligence

The report investigated AI companies that primarily develop technology used for facial recognition and surveillance for the Chinese military. According to the report, this technology has been used to identify and track Uyghurs living in China.

For instance, Megvii, developer of the Face++ facial recognition software, is one of the primary companies investigated, receiving over $15 million from GGV Capital since 2019. Roughly two-thirds of Megvii’s revenue came from CCP surveillance projects in the year GGV invested in Megvii, the report stated.

After GGV Capital made its investment, Megvii was placed on “multiple US government red flag lists over its involvement in surveilling and tracking Uyghurs in Xinjiang,” according to the report.

A GGV Capital spokesperson told Tech Policy Press that the company is “actively seeking exit” from investments with Megvii. The committee’s report noted that the firm has faced challenges with the separation due to “limited market appetite for purchasing the shares.”

GGV Capital is also splitting into two separate entities, GGV Capital U.S. and GGV Capital Asia, a transition the firm expects to complete by the end of March. According to a statement provided to Tech Policy Press, the split will be a “separation of all business and operational processes to function as separate and independent firms.”

GGV Capital US “will not invest in China,” the statement said.

While the committee’s report called efforts to split off from China “a step in the right direction,” Reps. Gallagher and Krishnamoorthi specified that legislative action is still needed to stop “future flows of American capital to problematic PRC companies.”

When Megvii filed for an initial public offering in Hong Kong’s stock market in late 2019, the company issued a now-archived report stating that agreements with customers require its technology to be used only for “civil purposes,” not for military use or human rights violations.

GGV Capital told the Medill News Service that the firm “was not aware of any potential (or actual) abuse of Megvii’s technology as an investment risk and only became aware when certain details became known publicly.”

According to the 2019 Megvii report, other major US finance firms were co-sponsors of Megvii’s IPO, including Goldman-Sachs, Citigroup, and J.P. Morgan. After Megvii’s 2019 IPO application lapsed, Megvii filed for a new IPO in Shanghai in 2021, and the major U.S. finance firms were no longer listed as co-sponsors. However, GGV Capital hasn’t ended its relationship with Megvii completely despite attempting separation.

Worries over China’s domination in microchips

According to the committee’s report, China also plans to dominate the semiconductor industry by 2030 by increasing domestic production and collaborating with foreign firms. Semiconductors are essential parts of electronic devices, used in a variety of products from smartphones to weapons.

The investigation found that Walden International, a venture capital firm headquartered in California, is one of the largest investors in the Chinese semiconductor industry. The firm may have invested as much as $2.2 billion in China’s semiconductor sector. This includes a combined $125 million investment in Semiconductor Manufacturing International Corporation, or SMIC, and its affiliated entities, which is now on multiple U.S. blacklists because it supplies the Chinese military.

Walden International did not respond to a request for comment.

Albert Keidel, an economist and professor at George Washington University specializing in East Asia, said he is skeptical of the report’s findings. He argued that the investigation misinterprets the firms’ investments as dangerous, when in reality the investments are common among growing economies.

Keidel noted that the report emphasized the firms’ investments in dual-use technologies. He said the report had “logical issues,” pointing out that foreign investment in US companies like Boeing could be interpreted as beneficial to the US military.

“Is investing in portfolio investments in large Chinese firms that have a dual purpose really going to stop the Chinese from advancing their technologies?” Keidel said. “I really doubt it.”

Several of the firms responded similarly to the investigation’s findings. According to the report, the firms made their investments “during an era of optimism.”

“We need to face the fact that China is a competent government that is trying to increase its standard of living,” Keidel claimed. “We’re pointing the finger at others that are becoming successful and good competitors.”

Rep. Krishnamoorthi’s perspective on dual-use technology differed from Keidel’s. According to a statement from Krishnamoorthi, the report shows investments in “sensitive sectors,” sometimes through blacklisted companies.

“Dual-use technologies pose inherent dangers in the wrong hands through their military applications,” Rep. Krishnamoorthi said in the statement. “Through its military buildup, ongoing genocide, and other human rights abuses, the CCP has shown that it does not deserve the benefit of the doubt.”

Consulting and intangible involvement

Beyond financial investment, some venture capital and consulting firms have been identified as providing intangible expertise and advice to Chinese companies supporting the military. According to the report, these services include talent acquisition, consulting and job training.

According to the report, GGV Capital worked with Tsinghua University to launch a financial training program for companies in GGV’s ecosystem. Walden International reported that it “often assists its portfolio companies with identifying talent, suggesting or connecting with other investors, and corporate strategy matters.” The report notes that the firm provided these services for SMIC.

Some consulting firms have also recently been identified as having collaborated with Chinese companies. The Financial Times reported last month that Urban China Initiative, a think tank led by Mckinsey & Company, advised the CCP and provided research instrumental to China’s 2016-2020 Five Year Plan.

In response, Rep. Gallagher issued a statement condemning McKinsey.

“One is left to conclude that McKinsey’s true mission is to make money, even if that money comes from genocidal communists,” Rep. Gallagher said in the statement. “Companies like McKinsey that help the CCP in its quest to destroy individual dignity and American global leadership should be prohibited from receiving taxpayer dollars.”

In response to the allegations made by The Financial Times report, McKinsey issued a statement asserting that “the Urban China Initiative is not McKinsey, and it did not perform work on McKinsey’s behalf.”

McKinsey stated that UCI was co-founded in 2011 with Columbia University and Tsinghua University. The consulting firm denied working with China, stating its “client work in China is overwhelmingly for US, multinational and Chinese private sector entities.”

McKinsey shut down UCI in 2021, following recent trends of divestment in Chinese organizations and separation from branches in China.

Next steps

Reps. Krishnamoorthi and Gallagher recommended that Congress pass legislation to prohibit investments in PRC companies on US sanctions and red flag lists, including the Uyghur Forced Labor Prevention Act Entity List. They also recommended that such lists be updated to include more companies with ties to China’s technology industries.

“The Committee’s findings suggest that there are billions of dollars beyond those captured in this report that have flowed into PRC companies that support the PRC’s military, digital authoritarianism, and efforts to develop technological supremacy and undermine American technological leadership,” the report said.