Trade War or Tech Cold War?
President Trump continues to escalate the United States (“U.S.”) and China Trade war. President Trump has expanded his campaign against China’s government by going after Chinese tech companies, jeopardizing the future of technology and innovation as investors must navigate cross-border tech investments amidst trade tensions. (Kevin Cirilli, Bloomberg L.P.) The Trump administration’s campaign to slow money flowing from investment funds into Chinese companies is not easing anytime soon, as U.S. politicians continue to claim venture capital funds and endowments have directed growing potions of their investments into Chinese companies linked to human rights abuses and national security threats.
President Trump draws a digital iron curtain as he repeatedly cites national security concerns over Chinese tech companies, including TikTok, an app owned by ByteDance, Ltd. (Candice Zachariahs, Bloomberg L.P.). The Trump administration previously ordered ByteDance to sell the app’s American operations by mid-September or “face a ban in the U.S.” (Aaron Holmes & Lisa Eadicicco, Business Insider). In addition to the Trump administration’s ongoing war against TikTok, President Trump threatened to ban WeChat, an app whose Chinese parent company is Tencent. (Sherisse Pham, CNN). Again, President Trump alleges WeChat poses a national security risk because the Chinese Communist Party can access collected user data. Id. President Trump’s war on TikTok and WeChat could set a precedent of forcing tech companies to choose between doing business in either the U.S. or China.
Over the past decade, China’s tech industry has seen a huge venture capital (“VC”) boom. VC investments amongst the U.S. and China surpassed the $18 billion generated through direct foreign investment, as investments between the two countries hit approximately $22 billion in 2019. (Peter Hsieh, Nasdaq). U.S.-owned VC firms doubled their investments in Chinese companies, reaching a record of $19 billion in investments between 2017 and 2019. Id.
According to Preqin, a company that provides financial data, VC investments in China were $9.7 billion in the second quarter of 2019, reflecting a 77% decline in VC investments in China from the same quarter the previous year, as investments in Chinese companies in the second quarter of 2018 were $41.3 billion. (Peter Hsieh, Nasdaq).
On top of the Trump administration’s attempt to curb Chinese tech companies, the U.S. State Department warned colleges and universities to divest from Chinese firms’ stocks. Id. The U.S. State Department’s warning suggests a potential increase in enhanced listing measures. Id. In response to President Trump’s increased scrutiny of college endowments and pension funds backing Chinese companies, only six U.S. funds with exposure to China have sought to raise capital in 2020, a substantial decrease from 21 the previous year. (Candice Zachariahs, Bloomberg L.P.; Kevin Cirilli, Bloomberg L.P.). However, JP Gan, founding partner of Ince Capital, warned “a total decoupling of U.S. funding and Chinese technology would also hurt American investors,” and that “U.S. pension funds and endowments have been the biggest beneficiaries from investing in the China growth story.” Id. Today, college and university funds back billions worth of investments in Chinese companies. (Kevin Cirilli and Shelly Banjo, Financial Post). In response to the Trump administration’s warning to endowments, China’s Foreign Ministry spokesman, Zhao Lijian, said “we urge the U.S. side to create a fair, just and non-discriminatory environment for Chinese companies’ investment in the U.S.” Id.
As President Trump attempts to deepen the split between the U.S. and China, VC investments may continue to falter. VC is generally the intersection of free markets and global capital, which many startup companies rely on. The Trump administration’s attack on Chinese tech companies and U.S. funding creates uncertainty amongst VC investors. Attempts by the U.S. to ban or prohibit Chinese products, services, and investments will fuel investor uncertainty and potentially regress globalization. Globalization, both economically and politically, could revert if different countries have access to different technology economies, information, and social domains.
As the 2020 U.S. presidential election nears, investors can make informed decisions once it is clear whether investments will continue under the Trump administration for another four years and attacks on Chinese companies will continue.