It’s been a dizzying few weeks following all the China news emanating from Washington, DC these days. While a “phase one” trade deal with China has been signed and appears to be moving forward as of a month ago (we covered the origins of this trade war extensively on TechCrunch in 2018 and 2019), it has also become clear that the Trump administration and its various agencies are aggressively targeting China on a variety of fronts.
Here’s what’s been happening with startup funding, Huawei, university research labs and cybersecurity breaches.
More challenges for startups fundraising Chinese dollars
As of a few weeks ago, the Trump administration completed the final rulemaking around its modernization of foreign investment rules. Those rules went into force today, and will help to define what startups can take money from which foreign nationals. Those rules will now be used by CFIUS -- the Committee on Foreign Investment in the United States -- which has authority to rule over major venture transactions.
Martin Chorzempa of the Peterson Institute for International Economics wrote an extensive overview of what’s changing here. The closest summary is that Silicon Valley startups that take significant money from overseas investors (significant here is generally about percentage ownership of a company rather than total dollars) will increasingly need to go through national security reviews in DC, which can vastly delay the closing of venture rounds.
While China is certainly in the crosshairs of these new rules, other investors have been hit by them as well. SoftBank’s Vision Fund, which had a very bad quarter this week, is also a target under these new rules, complicating that fund’s future investments in America.
Some firms, though, are preparing for the long haul. Sequoia hired a major CFIUS veteran to be its general counsel last year, and from what I hear, other venture firms are providing more advice to founders to actively avoid international investors that might trigger these sorts of national security reviews in the first place.
All this of course is in the context of a collapse in Chinese venture capital, which was already in dire straights even before the coronavirus situation the past few weeks put a massive brake on the Chinese economy. Chinese VC dollars flowing into the Valley hasn’t stopped, but it is a trickle from the sloshing free-trade days of just a few years ago.
Huawei is coming to the West, despite the wishes of the Trump administration
The Trump administration has made it a high priority to shut Huawei out of Western telecom systems. It first tried to do that by essentially shutting down the company along with China’s ZTE by banning the two companies from receiving U.S. export licenses to American technology critical to their products. That set of moves ultimately created blowback for the administration a few years ago and galvanized Xi Jinping and the Chinese government to create more indigenous devices.
The Trump administration is continuing to lose its war against Huawei though. In recent weeks, both the United Kingdom and Germany have indicated that they will accept Huawei equipment within their next-generation telecom networks, despite immense pressure from U.S. defense and intelligence officials pushing against that decision.
Part of the challenge for the Trump administration is that it isn’t even pushing forward with one voice. The Defense Department has actually supported Huawei’s position, arguing that fighting Huawei will ultimately undermine American chip market leaders like Intel, who need Huawei as a customer of their chips to continue funding their R&D efforts.
Meanwhile, Huawei late last week sued TechCrunch parent-parent-parent-parent-parent company Verizon (okay, maybe it’s only like three levels of corporate bureaucracy between us and them — I’ve honestly lost track in the reshuffles) over patent infringement. As the 5G race continually bubbles (it’s not really heating up, despite attempts by telecoms to say otherwise), expect more of these patent fights.
Fighting Chinese influence in American university research labs
Most notably here, prosecutors at the Department of Justice charged Harvard University’s chairman of the department of chemistry Charles Lieber with failing to disclose payments he received from China totaling millions of dollars. Such disclosures are required because Lieber accepted federal research dollars through programs run by the National Institutes of Health and Department of Defense.
The payments described in the department’s complaint included a monthly honorarium of $50,000, hundreds of thousands of dollars for annual living expenses, and millions of dollars to build out a research lab at Wuhan University of Technology as a “Strategic Scientist.” Two other scientists were named in the complaint as well.
That’s not all, though. We learned this morning that the Department of Education has launched new investigations into Harvard and Yale to look at billions of dollars of overseas funding for those universities over the past few years, attempting to triangulate exactly who gave money to those institutions and why. The Wall Street Journal reported that the prime targets of funding come from China and Saudi Arabia.
Finally, Aruna Viswanatha and Kate O’Keeffe of The Wall Street Journal compiled a number of university-level investigations, finding that dozens more scientists and other academics have failed to disclose overseas ties and funding, mostly from China.
These investigations have become a higher priority as the U.S. government increasingly feels that China has built an apparatus for stealing U.S. technology, particularly at the frontiers of science.
Justice indicts four Chinese nationals over Equifax breach
Finally, the other major story in the China influence operations beat is that the Department of Justice indicted four Chinese nationals over the 2017 Equifax breach that led to the loss of data for more than 150 million Americans.
According to the department’s complaint, four Chinese military hackers associated with China’s People’s Liberation Army broke into Equifax’s systems using an unpatched security vulnerability in Apache Struts.
The department’s indictment serves two purposes, even though the four alleged individuals in the indictment are highly unlikely to ever be prosecuted (China and the U.S. do not have an extradition treaty, nor is China likely to hand over the individuals to the U.S. justice system).
First, the indictments serve notice to China that the U.S. is watching its actions, and is able to determine with a high degree of precision who is breaking into these vulnerable technology systems and what they are taking. That’s important, as there are serious concerns in the defense community about identifying actors in cyberwar.
Second, the charges also help connect the Equifax case to a similar breach at the government’s Office of Personnel Management, in which data on millions of government workers — including defense and intelligence personnel — was believed to be leaked to Chinese state-backed hackers.
Fighting Chinese influence has become a major project of DC officials, and therefore we can expect to see even more news on this front throughout the year, particularly with an election coming up in November.