Kai-Fu Lee, chairman and chief executive officer of Sinovation Ventures, speaks during an event. (Photographer: Justin Chin/Bloomberg)

A Top China VC Threatens to Scale Back Investment in U.S.

(Bloomberg) -- Kai-Fu Lee, a prominent Chinese venture capitalist and former president of Google China, said his investment firm may scale back in the U.S. if relations between the two countries deteriorate further.

Lee, the chairman and chief executive officer of Sinovation Ventures, said his firm would likely try to lure talent from the U.S. to China instead of investing in American businesses. Lee said his next steps will hinge on a planned meeting between Chinese President Xi Jinping and U.S. President Donald Trump at the Group of 20 nations summit in Buenos Aires. Lee didn’t specify what would need to happen to forestall his retreat.

A Top China VC Threatens to Scale Back Investment in U.S.

“Our U.S. strategy is pending on the Argentina meeting, to see if there is a U.S. strategy,” Lee said in an interview with Bloomberg at the CEC Capital Summit, an annual event in California hosted by a Beijing investment bank. “We don’t have to invest in the U.S.”

Founded in 2009, Sinovation Ventures was one of the first Chinese VC firms with a presence in the U.S. Other global firms, including Sequoia Capital and GGV Capital, have propelled their brands using a similar strategy that promises entrepreneurs a bridge between the world’s two largest economies. Sinovation Ventures manages about $2 billion between six funds in U.S. and Chinese currencies. It holds shares in more than 300 companies, most of which are in China. The financial impact of a U.S. pullout for the firm would be muted.

“Ninety-five percent of our past money was invested in China, so that could easily be 98 percent or 100 percent if that’s what it takes,” Lee said. “We may end up with two internets. We may end up with two sets of AI. We may end up with two sets of internet governance principles.”

Lee’s uneasiness reflects a common feeling among Chinese-rooted investors doing business in the U.S. The Trump administration has blocked or delayed deals, large and small, between U.S. and Chinese tech companies. In the first five months of the year, Chinese acquisitions and investments fell to the lowest level in seven years, a drop of 92 percent, according to Rhodium Group, a global economic and policy research firm.

In August, Congress gave the Treasury Department the authority to strengthen the Committee on Foreign Investment in the U.S., or CFIUS, an inter-agency panel that reviews cross-border business transactions for national security risks. Under new rules, even a small investment can be flagged for CFIUS review.

“CFIUS regulation is probably the most worrisome for us all,” Lee said. “The easy thing for us to do is to look for smart, technical Chinese people in America and bring them back to China. That is what the current American policy is forcing us to do. That can’t be good for the future, but if you’re in my shoes, what other choice do you have?”

Talks between the U.S. and China to settle a tit-for-tat trade war have made little progress since May, with tariffs on $200 billion of Chinese imports due to rise to 25 percent in January from 10 percent. A key point of contention for the U.S. has been allegations that China engages in widespread intellectual property theft. Trump intends to focus on broad themes with Xi at the G-20 and potentially set a framework for the two countries to work together, Commerce Secretary Wilbur Ross said on Thursday. Ross said he doesn’t anticipate the U.S. and China will secure a full deal by January.

Lee said his initial goal for Sinovation Ventures in the U.S. was to help companies there reach Chinese consumers and then the rest of the world. His investments in the U.S. focus on robotics, artificial intelligence and education technology, with stakes in startups that make autonomous delivery robots, energy data collection tools and AI to improve factory production.

“If our founders were half American and half Chinese, if our money was half American and half Chinese, then both countries gain,” Lee said. “It should be doable, but the current trade dispute seems to make that an impossibility. So, we are actually on the path to increasingly separate the two parallel universes.”

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