“A phenomenon that is remarkable throughout history, regardless of place or period, is the pursuit of policies by governments that are contrary to their own interests … Why do high-ranking officials so often act contrary to the way that reason points? and enlightened self-interest suggests? Why does the intelligent mental process so often not seem to work? ”
These questions, from the enlightening book of historian and author Barbara W. Tuchman March of Fools: From Troy to Vietnam (1984), may have appeared more often in people’s minds now than at any point in the last few decades.
Gary Rieschel, founding managing partner of Shanghai headquarters venture with $ 6.2 billion under management Qiming Venture Partnersis probably one of them.
In his eyes, policy-making on both sides of the Pacific could potentially lead to “disaster” outcomes. Dangerous brinkmanship should be avoided at all costs, and yet it seems to happen more often.
Rieschel seems to have plenty of cause for concern. Qiming, like other US dollar venture funds in China, is caught in the crossfire of the worsening technology war between the US and China.
In fashion of in the absence of a nail, a series of intertwined events: questions about US public pension funds that indirectly fund Chinese technology companies; China’s hard tech crash; US listed Chinese companies face potential delistings; and a massive stock market carnage in the Chinese technology sector has led to a thorough overhaul of the venture capital game in China.
U.S.-owned venture investments in Chinese startups have shrunk to a seepage of the estimated $ 2.5 billion by 2020, which is far from the nearly $ 20 billion that was witnessed in 2018, according to a research report by the Rhodium Group and the National Committee on US-China Relations last year. Chinese internet entrepreneurs have specifically raised more RMB funding and reduced fundraising in U.S. dollars from 2019 to 2021.
The decline was in line with a broader Chinese VC market cooling from 2018 to 2020, and there was a recovery in activity in 2021 that can last. But there is no doubt that the logic of US dollar fund investments in China has changed forever.
Political considerations have become just as important for economic calculations. Gone are the days when investors and entrepreneurs only cared about market competition, growth projections and return on investment. Today, there is a new set of questions: Should I take US dollars from US venture funds? Is this company too sensitive? Does this startup have too much government involvement?
Venture capitalists are forced to become political analysts and turn an effort at calculated risk-taking into a random walk down the political playing field. What’s more, Chinese venture capitalists are forced to become philanthropists. Sequoia Capital China’s founder Neil Shen said in a speech in 2021 that early investment should be “half commercial, half non-profit. ”
It is, of course, worrying development, and one cannot avoid being worried in such circumstances. But Rieschel told me in an interview last week that he still sees reasons for optimism.
He expects that the potential delisting of Chinese companies from US stock exchanges will soon be resolved, and more communication will lead to better collaborations. But with more regions entering the Covid lock in China, it’s hard to see how that can take place. But being hopeful may be the only option in this uncertain time.
Nina Xiang: What is the most fundamental driving force for the changing relations between the United States and China: power, ideology or trust?
Gary Rieschel: It’s about them all. Xi Jinping is truly the first Chinese leader in generations to focus on ideological competition. Deng Xiaoping, Jiang Zeming and Hu Jintao never did.
This happened at a time when the United States was going through its own identity crisis. Almost everything in the United States is now seen through the lens of politics. What the US needs to do (to solve its problems) has little to do with China.
China would view some US actions (even if they are designed to solve its own problem) as an attempt to limit its progress, and communication is therefore critical. Both countries need to focus more on the development of their own populations and societies and be more transparent about each side’s political intentions.
Can the relationship still be saved?
I am optimistic and I hope it will succeed. But because of Covid, there has been very little interaction between Chinese and American businessmen, politicians, military, and students for over two years.
Xi Jinping may be trying to use Covid to force China’s more independence from the West to suit his own purposes. I think it’s a mistake. Both countries need each other and must make an effort to reunite with each other. People here (in the US) say we should stop Chinese students from coming to universities here because they can be spies. It is also short-term.
Is the Biden administration’s technology policy towards China, which is a continuation of the Trump era’s policy so far, appropriate?
Some Chinese companies have been sanctioned for human rights and Xinjiang. I do not agree with the American categorization of what happened in Xinjiang. It’s awful, but I’m not sure I would call it a genocide. But certainly, that kind of minority oppression is completely wrong from an American point of view.
DJI should not be on the list. Tiktok should never be considered on the list. But then China also blocks all possible American companies. China has long favored domestic industries. Huawei has benefited greatly from the support and funding of the Chinese government.
This goes back to my point about how the US should solve its problem by focusing on, in this case, having a US company that directly competes with Huawei.
Questions have been raised about whether U.S. capital should be used to help fund China’s technological advances. What is your view?
I’m biased because Qiming invests in Chinese technology companies. I am opposed to banning US capital investment in Chinese private technology companies. Conversely, I do not believe that the United States should block Chinese private money investing in American companies. We must work very hard to keep bilateral capital and intellectual currents open.
Of course, some types of investment, such as US governments investing in sensitive Chinese companies or Chinese entities like their sovereign wealth fund, China Investment Corp., may not be appropriate. But a general ban on US capital for Chinese companies would be a mistake.
How do you see things evolving from here?
There is pressure to become more restrictive with investing in China. Public money can run into several restrictions. The Chinese and US securities regulators have been working hard to resolve the potential delistings of Chinese firms from US stock exchanges. But they should have worked on this 15 years ago!
Unfortunately, our systems only change when we are on the brink of something truly catastrophic. At some point, it can go too far. That’s what I’m worried about. If we do not increase these dialogues in intensity and breadth, we run much greater risks.
A technological decoupling between the two countries will see different degrees of separation across different sectors selectively. How do you see it unfolding?
This decoupling is asymmetric. There is very little Chinese technology in the United States, but China clearly does not want their enterprise software to be based on American technology. It’s not so much about decoupling, but rather that China provides economic incentives to make its technology more indigenous.
One thing that worries the United States is that China is not playing fair. There are reports of hundreds of billions of dollars in potential intellectual property losses, but in a $ 14 trillion economy, it really is not that big. Still, I do not think it is the intelligent answer to throw up your hands and say that you should never have worked with Chinese companies.
Nor is it an intelligent response for China to say that we have never stolen any IP, or that you must transfer your IP in order to operate in China. Both sides take positions that are not really best for long-term collaborations.
Can China’s technology sector still be invested?
China’s regulatory action should have taken place a long time ago to correct some of the anti-competitive and monopolistic behavior. It is necessary. Some people say that means companies can not get too big in China in the future. I do not think that is the case.
But some policies, as in the education sector, did not solve the problem. The real solutions may be to change the Hukou system, the qualifications for university entrance exams and create quotas for the poorest provinces at top universities.
Will the very strict data security and privacy laws hinder the future development of Chinese technology companies?
Since the laws apply to companies operating in China, it should be a level playing field for all companies. That may be okay, but we have to see.
Still, I think the Chinese government may have overreacted. More often than not the US government, the Chinese government tends to look at successful entrepreneurs and say “they are successful because we let them be.”
The Chinese government often grossly overestimates their own capabilities. They could do that by deciding which sectors they want to promote development in. But now they are moving on to selecting winners at the individual company level with programs like “small fights“It’s going to be catastrophic.
How have all of these affected Qiming’s investments?
Both entrepreneurs and investors have to face unpleasant questions. When we think it’s sensitive, we’ll tell entrepreneurs not to take money from us. In other situations, if they are really worried about what the Chinese government would feel about having foreign investors, even from our RMB-denominated fund, then they should rather take money from pure Chinese funds. There must be honest discussions.
There is nothing that prohibits US dollar-funded companies from listing on the stock exchanges in Shanghai, Shenzhen or Hong Kong. Right now, you can take dollar-funded companies publicly on Chinese stock exchanges. They just need to be structured properly and investors need to be more patient because the conversion of dollars takes time.
Does that mean you can invest in a smaller selection of companies now?
Ten years ago, we were able to invest in 90% of the opportunities with our US dollar funds. Let’s say that now we can still invest in 75% of them, so we still cover the vast majority of opportunities.
We have significant semiconductor practices, large investments in artificial intelligence, advanced manufacturing, healthcare and enterprise software.
Qiming is the first venture firm to be funded in China, but raised funds in the United States with a strategy to invest in U.S. healthcare companies for cross-border collaboration. How well does this strategy work?
We have raised $ 600 million across three funds in the United States over the past five years. We have had nine IPOs, four companies licensed their technology to Chinese companies, and we helped a handful of Qiming portfolio companies get in touch with US companies.
Neil Shen, founder of Sequoia Capital China, said in a speech that early investment should be “half commercial, half non-profit.” Would it work?
Every billionaire in China is figuring out a way to speak positively about the “common prosperity” and give money back to society. Suddenly, people all become very philanthropic.
The conversation has been edited and compressed for clarity.