A congressional investigation has found that five U.S. venture capital firms invested more than $1 billion in China’s semiconductor industry since 2001, fueling growth in a sector the U.S. government now considers a security threat. national.
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 House Select Committee on Representatives on the Chinese Communist Party.
The investments included approximately $180 million that went to Chinese companies that the committee said directly or indirectly support Beijing’s military. This includes companies that the U.S. government says provide chips for China’s military research, equipment and weapons, such as Semiconductor Manufacturing International Corporation, or SMIC, China’s largest chipmaker.
The House committee’s report focuses on investments made before the Biden administration imposed sweeping restrictions aimed at cutting off China’s access to U.S. financing. It does not allege any illegality.
Last August, the Biden administration banned US venture capital and private equity firms from investing in Chinese quantum computing, artificial intelligence and advanced semiconductors. It has also imposed global limits on sales of advanced chips and chip-making machines to China, arguing that these technologies could help improve the capabilities of Chinese military and spy agencies.
Since its creation a year ago, the committee has called for increased tariffs on China, attacked Ford Motor and others for doing business with Chinese companies and highlighted concerns about forced labor involving Chinese shopping sites.
The report recommended that Congress curb investments in all Chinese entities that are subject to certain U.S. trade restrictions or included on federal “red flag” lists, as well as their parent companies and subsidiaries. That would include companies that partner with the Chinese military or have ties to forced labor in China’s Xinjiang region. The U.S. government should also consider imposing controls on other industries, such as biotechnology and financial technology, lawmakers said.
Sequoia said last June, before the committee announced its investigation into private financing, that it would separate its Chinese subsidiary from its U.S. operations and rename it HongShan. A few months later, GGV Capital said it would separate its Asia-focused business.
Walden did not respond to a request for comment. A GSR representative declined to comment. GGV provided a list of corrections and clarifications to the report and stated that it has complied 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 implemented processes to ensure compliance with U.S. laws. The company finalized its separation from HongShan on December 31.
A Qualcomm spokeswoman said its investments were small compared to venture capital firms and represented less than 2 percent of the investments discussed in the report.
Washington officials increasingly see business ties, including with private Chinese technology companies, as problematic, arguing that China has sought to leverage 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 was logical,” said Rep. Mike Gallagher of Wisconsin, the committee’s chairman. “It just failed.” And he added: “Now I think there is no excuse.”
The 57-page report is based on information provided to the committee by the companies about their investments, as well as interviews with senior executives at several companies.
The committee’s report analyzed only some of the funds flowing to 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 seed funding. That investment peaked in 2021.
Venture capital firms pursued aggressive global expansion, particularly in Asia, for several decades. But since the Trump administration adopted a more aggressive stance toward China, they know that investments in Chinese companies would be subject to increasing scrutiny.
“No one is touching China now,” said Linus Liang, an investor at venture firm Kyber Knight Capital.
Breaking up investment entities with ties to China, as Sequoia and GGV did, may not resolve the committee’s concerns about U.S. financing and technology ending up in Chinese companies, the report said. HongShan, the newly spun-off China-based company from Sequoia, counts American investors among its backers. And HongShan and GGV’s new unit, GGV Asia, could still invest in American startups, according to the report.
Much of the report focuses on Walden International, a California-based company that was one of the first and most influential foreign investors in the Chinese chip sector. Walden is led by Lip-Bu Tan, former CEO of Cadence Design Systems, a chip design company, and current member of Intel’s board of directors.
Walden International created several funds for the chip sector in partnership with the Chinese government and Chinese state-owned companies, including a prominent military supplier, according to the report.
He was a founding shareholder and early funder of SMIC, which is now subject to US trade restrictions due to its ties to the Chinese military. Walden donated $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.
It is credited with bringing SMIC and other companies a combination of funding, tools and intellectual property for chip design, as well as profitable customer connections.
Although the US government labeled SMIC a “trusted customer” in 2007, skepticism about the company’s activities has grown in Washington in recent years. Today, the company is key to China’s ambitions to create a thriving chip sector and reduce its dependence on the United States.
Walden, along with Qualcomm Ventures, the investment arm of chipmaker Qualcomm, 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 vital to China’s efforts to develop its chipmaking industry after the United States imposed restrictions on the sale of the most advanced chipmaking machines to China.
China’s semiconductor companies are well funded by the country’s government. But ties with American venture capital firms give Chinese companies management experience as well as access to technology and the American and European markets. American venture capital firms have also attempted to influence American officials and regulators in favor of their Chinese portfolio companies, such as TikTok.