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Chinese tech investment withstanding US trade tensions, panelists say

As trade tensions with the U.S. intensify, venture capital and private equity funds are undeterred from investing in Chinese technology companies, according to investment managers.

The impact of U.S. tariff increases and restrictions on imports from China was a hot topic at the Hong Kong Venture Capital and Private Equity Association's China Private Equity Summit 2019 on May 30.

Venture capital and private equity investment into China does not appear to have suffered due to the environment, panelists said. They totaled US$22 billion in 2018, with some US$19 billion from the U.S., according to Frankie Fang, founding managing partner at Starquest Capital.

"The value of investments from the U.S. to China doubled from that in 2017," he added.

Chinese funds, anticipating an increase in demand from local firms for semiconductor chips made in the country, are also investing in the sector, according to Linda Luo, managing director of KHL Capital Hong Kong.

Domestic chip manufacturers stand to gain as alternative suppliers to Huawei Technologies Co. Ltd. and potentially other Chinese companies, who may be restricted from purchasing from U.S. firms. Earlier this month, the U.S. government began requiring U.S. companies to obtain a special license to work with Huawei or its subsidiaries, although some restrictions were later rolled back on a temporary basis.

There is already at least one case of a Chinese company seeing huge increases in business from domestic companies due to the trade tensions, said Charles Yuan, a partner in Greenwoods Asset Management Ltd.'s private equity funds.

Many Chinese funds have added domestic integrated circuit businesses to their portfolio as a result of this shift, Luo said.

Greenwoods set up a Shenzhen office very recently as many technology startups are bred in the city, Yuan said. U.S. President Donald Trump's rhetoric did not weigh on its decision, he said.

Additionally, state-backed funds will invest in the technology sector more aggressively than others as it is in the national interest, James Donnan, managing director at Intertrust Asset Management (Cayman) Ltd. Hong Kong said.

"What we observed is a tremendous opportunity for China to develop technologies on its own," Donnan said. Chinese tech companies are being forced to decrease their reliance on the U.S. and Europe, he said.

In doing so, Chinese companies may look to Taiwan for skilled personnel such as engineers, Luo said. "U.S.-China tensions can also give the island an opportunity to thrive," she added.

Brian Snyder, counsel in Morrison & Foerster LLP, specializing in M&A and private equity matters said deal numbers have not dropped either, although valuations have potentially been impacted. "As far as our deal flow, actually it does not change," he said. "We do see some down-run on valuation."