US investors in Chinese venture capital funds are rushing to align with recently enacted regulations banning investments in companies developing artificial intelligence and other advanced technologies linked to China’s military, the People’s Liberation Army (PLA).

The measures, initiated by the Biden administration and effective as of Thursday, impose civil and criminal penalties on US entities investing in Chinese firms involved in semiconductors, quantum computing, or AI systems that could serve military purposes.

These rules demand rigorous due diligence, requiring US investors with funds in Chinese ventures to obtain “binding contractual assurances” ensuring their investments are not used to acquire companies that violate these restrictions.

While some investors have secured compliance guarantees from Chinese fund managers, others have faced refusals, according to sources advising major pension and endowment funds. In response, many investors have halted or scaled back new investments in China amid escalating US-China tensions. Prominent Silicon Valley firms, including Sequoia Capital and GGV Capital, severed ties with their Chinese branches in 2024.

The timing of these restrictions coincides with a potential shift in US-China relations under president-elect Donald Trump, who has pledged to heighten tariffs on Chinese imports, further complicating the investment landscape in the world’s second-largest economy.

The rules reflect a growing bipartisan consensus in Washington advocating for stricter measures to prevent China from advancing in militarily sensitive technologies. A February report from the US House of Representatives’ China committee revealed over $3 billion in US venture capital investments had supported Chinese companies driving military advancements.

Investors granted assurances will need to conduct ongoing due diligence to ensure compliance, a complex task given Chinese laws empowering the state and individuals to counteract perceived “discriminatory” foreign sanctions.

“The challenge is that US investors are signing binding agreements with entities that might face conflicting obligations,” said Phil Ludvigson, a partner at King & Spalding specializing in national security risks tied to foreign investments. “It creates a challenging dynamic for all parties involved.”

The restrictions could also dampen investments in non-prohibited sectors in China, particularly due to the pervasive use of AI.

“US dollar foundations have essentially ceased new commitments in China,” said an executive at a large American endowment fund. “The bar for private-sector investments has become nearly insurmountable.”

China reported its lowest annual foreign direct investment since the 1990s in 2023, while foreign capital in its venture capital sector dropped 60% to $3.7 billion, according to Dealogic.

US Investments in China’s Tech Sector

Over the past decade, US-based investors—including Silicon Valley venture firms, wealthy family offices, and public pension and endowment funds—have funneled billions into China’s tech industry.

HongShan, formerly Sequoia Capital’s China arm, raised nearly $9 billion in 2022, with about half originating from US limited partners. Hillhouse, established in 2005 with a $20 million investment from Yale University’s endowment fund, has grown into a $65 billion tech investment giant.

Other prominent US investors in China include the $460 billion California Public Employees’ Retirement Fund and the $260 billion New York State Common Retirement Fund, each allocating 1%-3% of their portfolios to China.

Between 2020 and 2023, the 72 largest US public pension funds invested $68 billion in China, according to a Future Union think-tank report.

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This article is based on reporting by the Financial Times. Original article available at: US investors in Chinese venture capital funds race to comply with AI rules.