GGV Capital published a notice on Twitter last week that it was severing ties with its China-focused team. The letter it published didn’t mention one detail: That the firm was one of a handful of venture capital shops being investigated by the House of Representatives’ newly formed Select Committee on the Chinese Communist Party.
The Committee, formed at the beginning of this year, was set up to protect both U.S. military interests as well as prevent human labor abuses. Chaired by Republican Wisconsin Representative Mike Gallagher, the Committee is just one piece of the U.S. government’s broader crackdown on companies and investment firms that are investing in China-based companies. President Joe Biden signed an executive order this summer that restricted potential new investments into high-tech Chinese companies.
The House Committee’s inquiries into venture capital firms, in particular, began in July, when the group sent letters to four VC firms that had made investments in Chinese semiconductor, AI, and quantum computing companies, requesting further information and suggesting that the firms had invested in companies that could be “linked to China’s efforts to profile and track” Uyghurs, a Muslim minority group in China. Since then, the inquiries have expanded to venture-backed startups, including Sequoia China-backed fast fashion unicorn Shein, which has been eyeing a public debut in the U.S.
In an interview with Term Sheet, Representative Gallagher said that these letters to venture capital firms were just the beginning of the Committee’s investigation. “We can't be complicit in gross human rights abuses like genocide, and that's really what these investigations are about,” Gallagher said.
Gallagher was referencing the alleged detention of Uyghurs and other predominantly Muslim minority groups in Xinjiang, a region in Northwest China where the U.S. government and dozens of other countries have accused the Chinese government of ongoing human rights violations, citing evidence of torture, sexual and gender-based violence, forced abortion and sterilization; as well as forced labor. The alleged abuses led to a new law in the U.S. that went into effect last year, called the Uyghur Forced Labor Prevention Act, which banned a list of Xinjiang-based entities from importing goods into the U.S. (Beijing has repeatedly denounced these allegations as false and accused the U.S. and Western countries of using false information to “strategically use Xinjiang to contain China.”)
Shein, in particular, which is backed by Sequoia China and General Atlantic, has repeatedly been accused of its supply chain being connected to Xinjiang, and an interim report the Committee on the CCP released this summer echoed those concerns and also accused the company of evading U.S. tariffs (Shein didn't respond to a request for comment for this story but has previously combatted accusations of forced labor and said it is "committed to respecting human rights and adhering to local laws and regulations in each market we operate in"). Earlier this year, a series of U.S. attorneys general requested the SEC require Shein to independently prove it does not utilize forced labor before it be allowed to go public in the U.S. markets.
“Certainly I think any company listing in the U.S. should face a lot of scrutiny, particularly if there's evidence that their supply chain runs back to Xinjiang,” Gallagher said.
GGV and General Atlantic declined to comment. Spokespersons for Shein and Sequoia didn’t respond to requests for comment.
In the last few years, venture capital investments into China from investors based elsewhere have shrunk as Beijing has introduced new challenges for foreign investors and as the U.S. has scrutinized investments in the area. In 2021, there were more than 1,100 deals in China. In the first half of this year, there have only been 264 deals so far, according to PitchBook. The percentage of deals including investors headquartered outside the region—10% of investments into Chinese startups for the first half of this year—is the lowest it's been since PitchBook started tracking the metric.
Gallagher said that his Committee is trying to “get our head around the scope and scale of” U.S. investment in private Chinese companies, and it will ultimately recommend a set of controls for investment firms to legislators. He emphasized that the tranche of letters sent thus far to VC firms hasn’t included “some of the biggest actors,” including Sequoia, which split its U.S., China, and India teams earlier this year.
While Gallagher declined to say whether his Committee planned to open an investigation into Sequoia China, he confirmed he is looking into other investments Sequoia has made.
“I'm not going to list the other ones that I think are problematic, but it goes beyond Shein,” he said.
The Select Committee on the CCP has subpoena authority, though Gallagher says the group has yet to use it.
“If we can get the answers and the participation we want without subpoenas, that’s great,” Gallagher said. “But we’re prepared to use them as soon as we feel like we're being stonewalled and people are refusing to testify or answer questions when asked.”
Gallagher said that he thought “it'd be a mistake” for companies to assume that any of the Committee’s efforts were “just Republican China hawks in Congress” or that this was just a “passing moment.”
“I think Republicans and Democrats are sincerely trying to get this admittedly very complex issue right and legislate a solution that endures beyond this administration and the next,” Gallagher said.
Gallagher said he ultimately envisions Congress passing legislation that would outright ban both public and private investors from making investments within certain sectors, such as investments into Chinese companies that build military equipment or Chinese AI companies.
“I actually think we can agree on this with the White House of sectors that that should be off limits,” Gallagher said.
It's unclear how widespread the impact will be across the industry. "We have not seen a clear, outstanding trend across the industry for U.S. VC firms to cut ties with their China arms," Kaidi Gao, a VC analyst at PitchBook said in an email, though she noted that "many U.S. investors" have become more cautious to invest in China and are closely monitoring how U.S.-China tensions evolve.
OpenAI’s potential blockbuster new valuation…The ChatGPT creator is reportedly in talks with investors to sell existing shares at a valuation between $80 billion and $90 billion, the Wall Street Journal reported this week. That’d be a massive uptick from the company’s last valuation earlier this year, at roughly $30 billion, and comes as OpenAI is reportedly on track to do over $1 billion in revenue in the next 12 months. Plus, the report was right around the same time that Amazon announced a massive investment into OpenAI competitor Anthropic of up to $4 billion. The OpenAI sale would reportedly allow employees to sell their existing shares versus issuing new ones. —Anne Sraders
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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