The new US government’s investment ban on China came into effect on January 2nd (Thursday), with US investment funds, also known as venture capital (VC), rushing to comply with the regulations.
The ban specifies that US entities investing in Chinese companies involved in semiconductor, quantum computing, or artificial intelligence systems used by the Chinese military could face civil and criminal penalties.
Furthermore, the regulation explicitly requires US investors to conduct due diligence. US investment funds investing in China must obtain “binding contractual assurances” to ensure that their funds will not be used to acquire companies that violate the regulations.
The Financial Times reported on Thursday, citing sources familiar with providing compliance advice to large retirement and donation funds, that some large investors have recently received such assurances from Chinese fund managers, while some investors’ requests have been rejected.
Amid escalating tensions between the US and China, many investors are reducing or suspending new investments in China.
Both US political parties have increasingly reached a consensus that the US must take more measures to prevent Beijing from gaining a competitive edge in key technologies, especially those with military significance.
Due to Chinese laws authorizing the government and private entities to retaliate against so-called “discriminatory” foreign sanctions imposed by other countries, US investors face numerous challenges in conducting due diligence.
Data from Dealogic shows that China’s annual foreign direct investment announced in 2023 hit its lowest level since the 1990s, with foreign investment attracted by China’s venture capital industry plummeting by 60% in 2023 to $3.7 billion.