Quote:Anew congressional report found that investments from five well-known American venture capital firms (VCs) into China’s artificial intelligence (AI) and semiconductor companies have fueled the growth of China’s military capability and the Communist Party’s digital authoritarianism against its people while undercutting America’s strategic technology advantage over China.

When China debuted its “Made in China 2025” industrial plan in 2015, it announced its ambition of achieving global dominance in high-tech manufacturing within a decade. The Chinese Communist Party (CCP) knew that the nation that enjoys dominance in the high-tech sector would dominate the world. Since the release of its 10-year plan, China seems to be on track to achieve its goal: The nation’s global share of the AI industry is projected to exceed 30 percent in 2035, and China’s rapid progress in chip manufacturing leads many observers to expect the nation will soon dominate the global semiconductor market.

The CCP always credits its leadership and home-grown ingenuity for China’s explosive technological advancement. However, according to findings by the U.S. House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party, it was decades of investments from American venture capital firms, including “funding, knowledge transfer, and other intangible benefits,” that “have helped build and strengthen the PRC’s priority sectors.”

Last week, the committee released a report titled “The CCP’s Investors: How American Venture Capital Fuels the PRC Military and Human Rights Abuses.” It found five American-headquartered VCs, including Sequoia Capital and Qualcomm Ventures, have made investments worth “at least $3 billion” into AI and semiconductors companies in China, including “more than $190 million into AI companies that the U.S. government now blacklisted,” and “more than $50 million into PRC semiconductor giant SMIC,” which was also blacklisted by the former Trump administration in 2020. Rather than viewing the “Made in China 2025” plan as a threat to the free world and democratic values, these VCs regarded China’s geopolitical ambition as an incentive to pour money and expertise into helping China build its high-tech sector.

These American VCs invested in Chinese companies that provided China’s communist government with products and services to enforce surveillance and oppression against the Chinese people. For example, GGV Capital invested over $15 million in Megvii, and Sequoia Capital China has poured some $20 million into Yitu Technology. Both Megvii and Yitu are on U.S. government entity lists because Chinese police have used these companies’ facial recognition technology to surveil and track Uyghur Muslims in Xinjiang.

Sequoia Capital and its China subsidiary have invested over $1.4 billion in ByteDance since March 2014. Another American VC, GGV, also invested in ByteDance in 2020 but left the investment in 2023.

ByteDance partners with China’s Ministry of Public Security and authorities in Xinjiang to “enhance the Internet social governance capabilities of public security agencies.” ByteDance is also the parent company of TikTok, an app that has applied the CCP’s censorship to non-Chinese citizens overseas and let Beijing access American users’ data it collects. Brendan Carr, one of the commissioners of the Federal Communications Commission, says TikTok “poses an unacceptable national security risk.” It is fair to say TikTok would not have become so popular in the U.S. without these American VC firms’ investment and expertise to help facilitate its overseas expansions.

Even more troubling is that these American VCs also invested in Chinese companies with ties to China’s military, the People’s Liberation Army (PLA). For example, GGV Capital has invested between $5 million and $10 million in AirLook, a drone company with a strategic cooperation agreement with the China Aerospace Science and Industry Corporation, which the U.S. government blacklisted since it is a notable PLA contractor.

Similarly, Sequoia Capital China invested some $13 million in EverSec, a cybersecurity company serving as a “Cybersecurity Emergency Service Support Unit” for the Chinese government, and has multiple contracts with the PLA, including one to create an AI “cyber threat intelligent sensing and early warning platform.”

Since semiconductors are a “dual-use” technology that powers everything in modern society, from cars to military weaponry, the Chinese government prioritizes dominating the global semiconductor sector. In response, the Biden administration has sought to restrict China’s access to advanced chip technology. Yet, according to the House committee report, the five U.S. VCs have, in total, invested over $1 billion in more than 150 Chinese semiconductor companies, and “these investments help the PRC increase its semiconductor production capacity and expertise, thereby bringing the country closer to being able to produce advanced chips on its own.”

For instance, in 2017, Walden International set up a $500 million fund with China Everbright, which is owned by the CCP, to fund the development of the country’s semiconductor industry. Walden’s investment and expertise helped China build Semiconductor Manufacturing International Corporation (SMIC). The U.S. government designated SMIC on multiple blacklists due to the company’s tie with the PLA and restricted SMIC’s access to advanced chip technology.

Yet, last year, China’s telecom giant Huawei rolled out its latest smartphone which is powered by SMIC’s chip and reportedly uses “advanced 7 nanometre (nm) technology,” indicating China has made rapid progress in high-end chip manufacturing. This example adds color to the House committee’s warning: “U.S. venture capital firms have invested in PRC artificial intelligence chip companies that seek to do exactly what U.S. export controls are meant to stop: advance China’s AI chip industry.”

The committee points out that the five U.S. VCs it investigated are only the tip of the iceberg. Many more U.S. companies have funneled billions of dollars to Chinese companies that “support the PRC’s military, digital authoritarianism, and efforts to develop technological supremacy and undermine American technological leadership. The status quo is untenable.”

Since the committee launched its investigation, Sequoia Capital and GGC split their China subsidiaries into separate legal entities in 2023, a step the committee doubted would prevent future flows of American capital to questionable Chinese companies. If anything, the committee believes such splits only provide legal cover for these VCs to continue business as usual.

Furthermore, these American VCs did the legal split less likely out of patriotic sentiment but more likely due to political pressures from both the U.S. and China. China has especially become a hostile environment for American businesses and their employees.

China’s sweeping counter-espionage law reportedly treats all “documents, data, materials, and items related to national security and interests” as state secrets and, according to Reuters, “allows authorities carrying out an anti-espionage investigation to gain access to data, electronic equipment, and information on personal property and also to ban border crossings.” Chinese authorities have targeted foreign companies and businessmen with raids, investigations, and detentions.

During the committee’s investigation, some VCs faced active pressure from Beijing not to cooperate with the U.S. inquiry or provide any documents, and others were “scared to death” about possible repercussions from Beijing if they did cooperate. One VC learned its general partner in China was thrown into jail (it was unclear if the imprisonment was related to the committee’s investigation).

It’s time U.S. lawmakers force VCs to stop aiding and abetting China’s abuses and high-tech advances. After all, America and China are engaged in fierce, high-stakes ideological and strategic competition. If American VCs’ employees don’t feel safe doing business in China now, they will find that a world where the CCP dominates with its military and technological advancements will be even less hospitable.

American VCs must stop being the CCP’s investors. Instead, they ought to invest in America’s success because their businesses can only thrive and their fortunes remain secure in a free society governed by the rule of law.