American companies invested $1 billion in Chinese chips, lawmakers say

A Congressional investigation has found that five U.S. 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 threat to national security.

The funds from 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 both Republicans and Democrats on the House Select Committee on the Chinese Communist Party.

The investments include about $180 million that went to Chinese companies that the commission says directly or indirectly support Beijing's military. That includes companies that the U.S. government says supply 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 to cut off China's access to U.S. financing. No illegality is alleged.

Last August, the Biden administration banned US 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 machines to China, arguing that these technologies could help boost the capabilities of China's military and spy agencies.

Since its creation a year ago, the commission has called for raising tariffs on China, targeted Ford Motor and others for doing business with Chinese companies, and highlighted concerns about forced labor involving Chinese retail sites.

The report recommended that Congress curb investments in all Chinese entities subject to certain U.S. trade restrictions or on federal “red flag” lists, as well as their parent companies and subsidiaries. This also includes companies that collaborate 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 sectors such as biotechnology and fintech, lawmakers said.

Sequoia said last June, before the commission 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 said it would spin off its Asia-focused business.

Walden did not respond to a request for comment. A GSR representative declined to comment. GGV has provided a list of corrections and clarifications to the report and stated that it complies with all applicable laws. In addition, GGV is trying to sell its stake in three companies discussed in the report.

A spokeswoman for Sequoia 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 the demerger of HongShan on December 31.

A Qualcomm spokeswoman said the investments were small compared to the venture capital firms and made up less than 2 percent of the investments discussed in the report.

Officials in Washington increasingly view business ties, even with private Chinese technology companies, as problematic, arguing that China has sought to tap private sector expertise to modernize its military.

The committees' leaders admitted 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 made sense,” said Representative Mike Gallagher of Wisconsin, chairman of the committee. “It just happened to fail.” He added: “Now I think there is no excuse.”

The 57-page report is based on information the companies provided to the committee about their investments, as well as interviews with senior managers at several companies.

The commission's report only looked at some of the funding flowing to China. Chinese semiconductor companies raised $8.7 billion in deals involving U.S. investment firms between 2016 and July 2023, according to PitchBook, which tracks seed funding. That investment peaked in 2021.

Venture capital firms have pursued aggressive global expansion, especially into Asia, for decades. But since the Trump administration took a more aggressive stance toward China, they knew that investments in Chinese companies would be subject to increasing scrutiny.

“No one is touching China now,” said Linus Liang, an investor at the venture capital firm Kyber Knight Capital.

Spinning off investment entities with ties to China, as Sequoia and GGV did, will not address the committee's concerns about U.S. financing and technology flowing into Chinese companies, the report said. Sequoia's recently separated China-based company, HongShan, counts U.S. investors among its backers. And HongShan and GGV's new unit, GGV Asia, could still invest in U.S. startups, the report said.

Much of the report focuses on Walden International, a California-based company that was one of the first and most influential foreign investors in China's chip sector. Walden is led by Lip-Bu Tan, the former CEO of Cadence Design Systems, a chip design firm, and a current board member at Intel.

Walden International has established several funds for the chip sector in collaboration with the Chinese government and Chinese state-owned enterprises, including a prominent military supplier, the report said.

It was a founding member and the first source of funding for SMIC, which is now subject to US trade restrictions due to its ties to the Chinese military. Walden donated $52 million to SMIC over decades, the committee found, as well as tens of millions of dollars to SMIC affiliates. Mr Tan was also a member of SMIC's board of directors.

He is credited with providing SMIC and other companies with a combination of financing, tools and intellectual property for chip design, as well as profitable connections to customers.

While SMIC was labeled a “trusted customer” by the US government in 2007, skepticism about the company's activities in Washington has increased in recent years. Today, the company plays a key role in China's ambitions to create a thriving chip sector and reduce dependence on the United States.

Walden, together with Qualcomm Ventures, the investing arm of chip maker Qualcomm, invested tens of millions of dollars in Advanced Micro-Fabrication Equipment, or AMEC, a Chinese company that makes the machines needed to produce chips. AMEC, a supplier to SMIC and other Chinese chip makers, is crucial to China's efforts to build its chip industry after the United States imposed restrictions on sales of its most advanced chip machines to China.

The Chinese semiconductor companies are well financed by the Chinese government. But ties with U.S. venture capital firms provide Chinese companies with management expertise and access to technology and the U.S. and European markets. U.S. venture capital firms have also tried to woo U.S. officials and regulators on behalf of Chinese portfolio companies, such as TikTok.