Caixin
Nov 23, 2018 05:51 AM
ECONOMY

Venture Capital, Faraday Cited in Renewed U.S. Allegations

Faraday Future's FF91 prototype electric vehicle is shown during a press event for CES 2017 in Las Vegas. Photo: VCG
Faraday Future's FF91 prototype electric vehicle is shown during a press event for CES 2017 in Las Vegas. Photo: VCG

The Trump administration cited Chinese government-backed venture capitalists and a struggling electric vehicle startup as examples of China’s allegedly unfair technology transfers and theft of intellectual property, central issues of contention in the ongoing trade war.

The renewed accusations against China were in a 53-page report issued Tuesday by the Office of the U.S. Trade Representative (USTR) updating a March finding that set off the trade war. In just over a week, President Donald Trump and President Xi Jinping are to discuss China-U.S. trade tensions at a G20 summit in Argentina.

“This update shows that China has not fundamentally altered its unfair, unreasonable, and market-distorting practices that were the subject of the March 2018 report” on a U.S. investigation of Chinese trading practices, U.S. Trade Representative Robert Lighthizer said Tuesday in the agency’s release.

China’s commerce ministry rejected the accusation as “groundless and unacceptable.”

"China is deeply concerned with the new accusations and urges the U.S. side to stop making statements or moves that are destructive to bilateral economic and trade ties," commerce ministry spokesman Gao Feng said at a press conference Thursday.

At stake are hundreds billions of dollars of businesses between the world’s two largest economies. A Chinese internet company executive said his company has become increasingly cautious in making investment in the U.S. tech sector and has tried to keep a low profile to avoid creating problems.

China and the U.S. launched tit-for-tat tariffs on nearly half of the imports from each other over the past few months, followed by heated rhetoric, tensions in the South China Sea and a recent exchange of barbs at an Asia-Pacific summit that fueled worries over the growing hostility. Investors, analysts and business leaders had hoped the Trump-Xi meeting in Argentina would begin to defuse the situation.

The USTR report published this week singles out several Chinese government-backed venture-capital firms including 6 Dimensions Capital, Digital Horizon Capital and Oriza Ventures Technology Fund. The document also cites Evergrande Real Estate Group’s $2 billion acquisition of a 45% stake in California-based Faraday Future. The report accuses China of failing to take substantive actions to address U.S. concerns over unfair business and trade practices.

Venture capital under spotlight

The report highlights the role of venture capital as China facilitates “systematic investment” in U.S. companies to obtain cutting-edge technologies and intellectual property. “Chinese outbound investment is increasingly focused on venture capital investment in U.S. technology centers such as Silicon Valley,” the report says.

Citing data from Rhodium Group, the report says that while China’s overall direct investment in the U.S. is declining, VC investment has maintained robust growth. Chinese VC investment in the U.S. from January to May 2018 reached almost $2.4 billion, equivalent to the previous full-year high set in 2015, according to the Rhodium Group data. Investment data from Bloomberg show that the value of VC deals with at least one Chinese-domiciled investor increased in 2018, reaching a record high by Nov. 15. to nearly $9 billion.

“As this data makes clear, Chinese VC investors are increasingly active in the U.S. VC ecosystem,” the report says.

The USTR identifies healthcare sector-focused 6 Dimensions Capital, high-tech investment fund Digital Horizon Capital and Silicon Valley-based Oriza Ventures Technology Fund as key players among China’s state-backed venture capitalists active in acquiring U.S. tech assets.

One of the largest healthcare-focused VC firms in the world, 6 Dimensions Capital has more than 10 billion yuan ($1.5 billion) under management. The report asserts that 6 Dimensions Capital, with links to the Suzhou city government, is behind much of the recent increase in Chinese VC investment in U.S. biotechnology.

Digital Horizon Capital, backed by state-owned Zhongguancun Development Group and Chinese tech heavyweights such as Alibaba Group and Baidu Inc., has invested heavily in “emerging sectors and technologies such as biotechnology and AI that the Chinese government has identified as strategic priorities,” the report says.

Oriza Holdings, the lead manager of Oriza Ventures Technology Fund, “has played a central role in China’s industrial policy, particularly in pioneering the Chinese government’s use of industry investment funds and VC funds,” the report says.

The venture capital companies haven’t responded to Caixin requests for comment.

Faraday Future’s new ally

The report also offers surprising support for Faraday Future, the troubled California-based startup backed by indebted Chinese entrepreneur Jia Yueting. Faraday is in a fight for control with its Chinese shareholder Evergrande while struggling with a cash crunch.

The USTR report calls Evergrande’s investment in Faraday an illustrative example of how Chinese investors focus their investments on industries favored by Chinese central government plans and policies.

Although a privately owned property developer, Evergrande’s chairman Xu Jiayin has close connections with the ruling Communist party and has said that “everything that Evergrande and I have, it is all given by the Party, given by the State, given by society,” according to the report, citing a speech by Xu in September.

The investment in Faraday gave Evergrande access to 380 patents registered in U.S. and China and the deal will help China realize its strategic goal of becoming an automotive power, according to the report, citing Xu’s speech.

A person close to Evergrande said the investment in Faraday is for pure commercial purpose and has cleared all required reviews from U.S. regulators.

Some analysts said the citation by the USTR report may add more uncertainty to the ongoing battle between Evergrande and Faraday’s founding team. Last year, an Evergrande unit agreed to invest $2 billion over three years and take a 45% stake in Smart King Ltd., which controls Faraday. The investment was seen as a white-knight rescue for cash-strapped Faraday.

But the deal soon fell into dispute as Evergrande argued that Faraday manipulated the deal to force Evergrande to make early payments, while Faraday’s Jia accused Evergrande of attempting to seize control of the company.

Cui Fan, a professor at the University of International Business and Economics in Beijing, said Evergrande’s investment in Faraday is unlikely to face new restrictions because of the report as it has secured necessary approvals.

While the squabble continues, Faraday is on the edge of financial ruin. In late October, Faraday furloughed most of its workers, retaining fewer than 100 employees with minimum salaries, casting doubt on its plan to start mass production of its first electric car model by the end of the year.

Contact reporter Han Wei (weihan@caixin.com)

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