Biden’s Not Pushing U.S. Investors Away From China. China Is

Original Article Published on The Information

The Takeaway: Chinese government policies had soured U.S. investors on Chinese companies before President Biden banned investments in certain high-tech sectors. But there are opportunities for common ground in sectors like energy.

On Aug. 9, President Joe Biden signed an executive order banning U.S. investments in China’s advanced technology sectors, including semiconductors, artificial intelligence and quantum computing.

The ban has attracted much attention, and concern from some investors. But it will have only a modest impact. Dollar-denominated funds in China with American limited partners already had halted investments in semiconductor companies, which now only take investments in Chinese yuan. Investors question how AI companies will make money. Quantum computing technology is largely still in the lab and has not drawn much investment.

Beijing views the measure as part of a U.S. effort to decouple from China. But Biden administration officials have signaled that they view the restrictions as narrow and targeted to avoid significantly harming China’s economy. Commerce Secretary Gina Raimondo reaffirmed this position during her visit to China in late August, framing the policy as a goodwill gesture rather than a hostile move.

Republicans have criticized Biden for not going far enough. U.S. Reps. Mike Gallagher and Jim Banks introduced a bill that aims to prevent private pension plans from investing in companies based in adversarial countries, particularly China. Nikki Haley, the former South Carolina governor vying for the Republican presidential nomination, declared, “we have to stop all U.S. investments in China’s critical technology and military companies—period.”

Even as rhetoric, this poses another threat to U.S. investors. No investment officers from university endowments, public pensions or foundations wish to be grilled in Congress about their investments in China. This could prompt some U.S. investors to avoid Chinese assets altogether.

But even that fear does not fully explain investors’ reluctance to invest in China since 2021. The real reason? China's regulations, sluggish economic recovery and poor returns on assets. American LPs' investments in China's tech companies have suffered significant declines, shaking confidence in the entire market. Look no further than Didi Global, which was delisted in 2022, a year after it debuted on the New York Stock Exchange with a market cap of nearly $80 billion. Biden’s executive order is the scapegoat.

A Shifting Investment Landscape

Since 2021, China's investment landscape has undergone a seismic shift, with new regulations ending two decades of market-driven development. A required cybersecurity review, which increases listing uncertainty, and registration at the China Securities Regulatory Commission, which delays the IPO process by six to 12 months, have hindered Chinese tech companies from seeking U.S. IPOs. These regulatory chokepoints have further depressed historically low prices for China's U.S.-listed tech stocks.

During the summer, while dropping off my kids at summer school in Massachusetts, I met with some U.S. LPs. Our discussions centered on exits, returns, and future investment opportunities. We delved into topics such as when Ant Financial and Didi might go public, when CSRC would approve tech companies for U.S. listings, and how China's economy would fully recover.

These discussions mirrored a meeting I had with a Harvard professor. He argued that investors are fundamentally apolitical, caring more about returns than politics. However, the one-two punch of U.S. domestic politics and China’s stringent regulations has forced investors to invest defensively and factor in geopolitical risks.

The reality is that poor returns on China investments have deterred U.S. investors from putting money into Chinese companies. Investors have put their China allocations on hold for roughly two years. Their patience is waning, but they haven't completely given up on China. Their reinvestment hinges on two critical moves by Beijing:

What U.S. Investors Need to See

First, investors need to see returns through exits of their existing investments. CSRC must expedite the approval process and allow more Chinese tech companies to list in the U.S. Certainty on exit and anticipated returns would help restore investor confidence.

Second, investors need to see future opportunities. China's policymakers must pivot away from catchy slogans to actionable policies. Aside from more substantial fiscal and monetary policies, expanded freedoms for the private sector are also needed to reinvigorate a fatigued economy.

On July 21, I participated in a closed-door symposium organized by CSRC in Beijing, where fund managers and LPs gathered to discuss bolstering LPs' confidence. The consensus among investors, including Blackstone, HarbourVest Partners, Canada Pension Plan Investment Board, Singapore's Temasek and GIC, United Arab Emirates’ ADIA and Mubadala, revolved around these two key policy changes.

If Beijing rolls out such policies, LPs stand to reap targeted and immediate gains in their portfolios. However, such short-term benefits won’t address the long-term challenges of Beijing’s policy shift.

Beijing's turn away from markets toward a stronger government hand has opened a new investment paradigm, reshaping China’s private market in favor of selected industries. All investors are flocking to Beijing's favored sectors, such as green technology and new materials, where there have been blockbuster private financing rounds and IPOs. Standouts include Zeekr, the premium electric-vehicle arm of Volvo’s parent company Geely Group, which raised $750 million at a $13 billion valuation this year and now is reportedly considering a U.S. IPO.

Fueled by burgeoning international demand, Chinese green tech companies have moved into foreign markets, with overseas investors following closely behind with fresh capital. XCharge, a Chinese charging infrastructure company now in 25 countries, received financing from Shell. Revenue at Singapore GIC-backed Envision Energy Group’s EV battery sector quintupled in 2022; the company hopes for a 2025 US IPO. Blackstone is reportedly considering acquiring Growatt Technology, a Chinese solar inverter company for $1 billion.

For savvy investors, awareness of industry directives and responding to future incentives means understanding the spectrum of government policies from the national to local levels. Knowing how to read and react to policymakers is now an essential competency.

Recently, I held a four-hour meeting with a major U.S. LP. Their approach to China is straightforward: Despite China's slowing economy, it still presents ample opportunities for those who understand how to choose the right general partners. They don't overlook China's economic challenges, but they recognize that small growth on a massive foundation yields impactful returns. The funds in which they’ve invested and historical returns reflect a deep understanding of China's economic governance and have only reinforced their convictions in this market’s opportunities.

In short, U.S. LPs need not invest in contentious industries like semiconductors or AI to benefit from China's growth. Rather, LPs should seek the common ground between the U.S. and China, where there are both ample investment opportunities and safeguards from geopolitical risks. Investments that help tackle pressing issues like climate change foster true win-win scenarios, where U.S. cooperation with China is not only necessary, but also advantageous.