US Firms Backed ‘Problematic’ Chinese Companies, House Panel Says

An investigation by the House Select Committee on China found that five U.S. venture capital firms have invested more than $3 billion in Chinese technology companies, many of which aid China’s military, surveillance apparatus and human rights violations, the committee said on Feb. 8.

Of the total, $1.9 billion went to artificial intelligence companies and at least $1.2 billion went to semiconductor companies, fueling “explosive growth” in those sectors, the committee said. The VC firms also provided expertise and credibility to the “problematic” Chinese companies.

“The United States has invested enormous time, resources, and government effort to prevent the transfer of sensitive U.S. technology” to China, the committee wrote in a 68-page report. “But U.S. venture capital flows have undercut those efforts by funding and providing intangible support to the very same companies that export controls and other regulations are intended to isolate.”

The committee, which began its investigation in July 2023 (see 2307200069), described the five VC firms as “case studies” and said it's likely that Chinese technology companies received additional billions of dollars from U.S. investors. The firms highlighted in the report are GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital and Walden International.

To curtail such outbound investment, the committee recommends that Congress pass legislation to prohibit investment in Chinese companies included on sanctions and red flag lists, including the Uyghur Forced Labor Prevention Act Entity List, the Treasury Department's Non-Specially Designated Nationals Chinese Military-Industrial Complex Companies List, the Commerce Department's Military End User List and Entity List, and more.

While Treasury is developing regulations to restrict outbound investment in China’s AI, quantum technology and semiconductor sectors (see 2308090066), the committee called on Congress to codify and expand on those restrictions. "Simply put, robust [China] outbound investment restrictions in key strategic sectors are a national security and human rights imperative," the report says.

Congress has been debating additional investment limits but has been divided over how to proceed, with some lawmakers preferring sanctions on individual entities over a sector-based approach (see 2401180067).

In a statement, Qualcomm downplayed its China role, saying it accounts for "less than 2% of the total investments discussed in" the committee's report. The other four firms didn't immediately respond to requests for comment.

Some of the firms told the committee that they made their investments when U.S.-Chinese relations were better and the U.S. government encouraged such activity. The committee noted that two of the firms, GGV and Sequoia, have announced plans to spin off their China businesses into separate entities, though it cautioned that the splits won't necessarily reduce U.S. investment in problematic Chinese companies.