A congressional investigation has found that five American venture capital firms have invested more than $1 billion in China’s semiconductor industry since 2001, fueling the growth of a sector that the U.S. government now considers a national security threat.
Funds provided by the five firms – GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital and Walden International – went to more than 150 Chinese companies, according to the report, approved Thursday by both Republicans and Democrats on the U.S. Special Committee House of Representatives was published by the Chinese Communist Party.
The investments included about $180 million that went to Chinese companies that the committee said directly or indirectly support Beijing’s military. These include 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 report focuses on investments made before the Biden administration imposed sweeping restrictions aimed at denying China access to American financing and technology. No illegality is alleged.
Last August, the Biden administration banned U.S. venture capital and private equity firms from investing in Chinese quantum computers, artificial intelligence and advanced semiconductors. It has also imposed global restrictions on the sale of advanced chips and chip-making machinery to China, arguing that these technologies could help improve the capabilities of China’s military and spy services.
Since its inception a year ago, the committee has called for an increase in tariffs on China, targeted Ford Motor and others over its dealings with Chinese companies and highlighted concerns about forced labor linked to Chinese shopping sites.
The report recommended that Congress curb investments in all Chinese companies subject to certain U.S. trade restrictions or on federal red flag lists, as well as their parents and subsidiaries. These include companies that work 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 fintech, lawmakers said.
Sequoia said last June, before the committee announced its probe into private financing, that it would separate its China arm from its U.S. operations and rename it HongShan. A few months later, GGV Capital announced that it was separating its Asia-focused business.
Walden did not respond to a request for comment. A representative for GSR declined to comment. GGV provided a list of corrections and clarifications to the report and stated that it complies with all applicable laws. GGV is also trying to sell its shares in three companies mentioned in the report.
A Sequoia spokeswoman said the company takes U.S. national security issues seriously and always has processes in place to ensure compliance with U.S. law. The company completed its separation from HongShan on December 31.
A Qualcomm spokeswoman said the investments were small compared to venture capital firms, accounting for less than 2 percent of investments discussed in the report.
Officials in Washington increasingly view business relationships even with private Chinese technology companies as problematic, arguing that China has sought to draw on private sector expertise to modernize its military.
Committee chairs acknowledged that many of these investments came as the United States promoted greater economic engagement with China.
“We all bet on China’s integration into the global economy 20 years ago, and that was logical,” said Rep. Mike Gallagher of Wisconsin, the committee chairman. “It just failed.” He added: “Now I just think there’s no excuse.”
The 57-page report is based on information the companies provided to the committee about their investments, as well as interviews with executives at several companies.
The committee’s report only looked at a portion of the funds flowing to China. According to PitchBook, which tracks startup financing, Chinese semiconductor companies made deals worth $8.7 billion between 2016 and July 2023, which also involved U.S. investment firms. This investment peaked in 2021.
Venture capital firms pursued aggressive global expansion, particularly into Asia, for several decades. But since the Trump administration took a more aggressive stance toward China, they knew investing in Chinese companies would face increased scrutiny.
“Nobody is touching China now,” said Linus Liang, an investor at venture capital firm Kyber Knight Capital.
Spinning off investment companies with ties to China, as Sequoia and GGV have done, may not address the committee’s concerns that American funding and technology could end up in Chinese companies, the report said. Sequoia’s newly spun-off Chinese company HongShan counts US investors among its backers. And HongShan and GGV’s new unit, GGV Asia, may continue to invest in U.S. startups, the report said.
Much of the report focuses on Walden International, a California-based company that was among the first and most influential foreign investors in China’s chip sector. Walden is led by Lip-Bu Tan, the former chief executive of Cadence Design Systems, a chip design company, and current board member at Intel.
Walden International has created various funds for the chip sector in collaboration with the Chinese government and Chinese state-owned companies, including a well-known military supplier, the report said.
It was a founding shareholder and early source of funding for SMIC, which is now subject to U.S. trade restrictions because of its ties to the Chinese military. The committee found that Walden donated $52 million to SMIC and tens of millions of dollars to SMIC subsidiaries over several decades. Mr Tan was also a member of the SMIC board.
He is credited with providing SMIC and other companies with a combination of funding, tools and intellectual property for chip design, as well as profitable customer relationships.
While SMIC was named a “trusted customer” by the US government 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 (AMEC), a Chinese company that makes the machinery needed to make chips. AMEC, a supplier to SMIC and other Chinese chipmakers, is crucial to China’s efforts to build 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 to U.S. venture capital firms give Chinese companies management know-how as well as access to technology and American and European markets. American venture capital firms have also sought to influence U.S. officials and regulators on behalf of Chinese companies in their portfolio, such as TikTok.