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December 3, 2020

Chinese funds invest in US tech despite Washington curbs


December 3, 2020

Washington: Chinese state-backed funds are still scouring the US for investments in critical technologies despite stiffer restrictions on such deals.

Pixelworks, Black Sesame Technologies and LightIC Technologies, three companies in the sensitive US semiconductor sector, have attracted investment in recent months from some of China’s government-guided funds.

The strategic investment funds, which number more than 1,600, are estimated to control more than Rmb4 trillion ($610 billion) in capital, according to Chinese consultancy Zero2IPO.

The US has stepped up scrutiny of Chinese investments over fears that critical technologies and intellectual property could be stolen, with even minority investments deemed a security risk under rules passed in 2018.

Joe Biden, the US president-elect, has promised to continue taking a tough line with China. However, advisers say he will be more likely to listen to the concerns of American tech companies, which argue they have been damaged by the trade war between the world’s two largest economies.

China’s government-guided funds are instructed by the National Development and Reform Commission, the country’s top economic planner, to invest in strategic emerging industries and advanced manufacturing sectors such as semiconductors, an area in which China is determined to catch up with the US.

Two of the semiconductor investments into US companies involve China’s National Integrated Circuit Industry Investment Fund (CICF), which was set up on the orders of the country’s cabinet in 2014 and initially capitalised with $20 billion. Its biggest shareholder is the Ministry of Finance.

California-headquartered Pixelworks, which is listed on Nasdaq, said in October that a consortium of Chinese investors, which are linked to the CICF, had acquired a stake. The company, which designs, develops and markets video- and pixel-processing semiconductors, said in a statement that the $6.6 million deal “serves as further validation of the interest and expanding opportunity for our technology in the China market”.

In a separate deal, Beijing Xinkin Energy Investment Fund, which is partially owned by the CICF, in September 2019 reported a 1.9 percent stake in artificial intelligence company Black Sesame Technologies, according to a Chinese government website. The Silicon Valley-based company was founded in 2016 and develops semiconductor chips used in improving vehicle navigation and safety.

Separately, two investors linked to government-guided funds applied last month to take a 16.7 percent stake in LightIC Technologies, according to a notice posted on a website that is a database of Chinese tenders. The California-based company develops systems that help power robotics and drone navigation.

Chinese venture investments into the US have plunged since Washington beefed up the Committee on Foreign Investment in the US, an inter-agency committee that can block deals on national security grounds, two years ago. The new rules gave Cfius authority to screen any arrangement involving “critical technologies”, such as biotechnology and semiconductors. Previously it could only review deals where control changed hands. Cfius would not comment on any specific deal.

Chinese venture capital investments into the US nearly halved in 2019 to $2.5 billion compared to 2018, according to Rhodium Group, a consultancy. In the first half of this year, Chinese venture investors poured $830 million into US start-ups, Rhodium data show.

Adam Lysenko, a US-based analyst at Rhodium, said it was not clear why some investments in apparently sensitive sectors were still taking place. However, he suggested it was possible that some deals had been approved by Cfius but its investigations had not been made public.

“Chinese policy funds often have a mandate to invest globally in any assets that can help achieve their designed ends,” Lysenko added. The CICF “has a vast network of hundreds of onshore subsidiaries and is linked to overseas companies through multiple investments”.

The news of the investments into America’s semiconductor companies drew bipartisan criticism from US senators.

Mark Warner, the Democratic vice-chair of the Senate Intelligence Committee, said a number of US companies that have taken investments from Chinese interests had subsequently had their intellectual property stolen by Beijing-connected companies.

Washington last year accused Huawei, the Chinese technology group, of attempting to steal technology used by T-Mobile, one of its US business partners. The charges are the subject of a Department of Justice case.

Warner said US companies must be fully aware of the risks they take in partnering with them.

Ted Cruz, the Republican senator from Texas, said there were still “too many loopholes” in US regulations that allowed such investments.

Pixelworks, Black Sesame and LightIC did not respond to requests for comment.

China’s Ministry of Finance and the Ministry of Commerce did not respond to faxed requests for comment. The Ministry of Foreign Affairs said it was “not in possession of the relevant information”. —The Financial Times Limited 2020