Describing June 6 as a "turning point," a "D-Day" marking the beginning of the end of US-Chinese economic relations, would certainly be an exaggeration. The bilateral relationship between the two major powers has been deteriorating for many years, yet trade between them has increased in the past few years.

The announcement made by the Californian venture capital giant Sequoia Capital in early June to split its China operations into three independent units signifies a substantial shift in the Sino-American economic landscape. Sequoia, founded by Don Valentine in 1972 and active in China since 2005, had played a crucial role as a startup investor, bridging the gap between the two nations and their respective entrepreneurial scenes, and had profited immensely from it. Sequoia China's portfolio included over 1,000 companies, among them well-known tech giants like the food delivery service Meituan, fintech company Ant Group, and TikTok's parent company, Bytedance, the world's most valuable startup. With assets under management of $56 billion, Sequoia's Chinese subsidiary had even surpassed its US parent, which managed $53 billion in the United States and Europe.

Sequoia's investors in China, as well as in India and Southeast Asia, are now expected to operate independently under their own brand name and a strategy tailored to their needs. The split is set to be completed by the end of March, with the hope that the division will simplify the startup financing business in the future.

Managing the threads worldwide had become increasingly challenging for Sequoia. Not only were the thousands of companies in which the investor had invested over the years slowly but surely getting in each other's way in competition, but political challenges had also escalated, from both sides.

On the one hand, Sequoia had been under pressure in the US for its 2014 investment in the Chinese drone manufacturer DJI, whose devices were alleged to be used not only by individuals but also by the Chinese government to surveil the Uighur minority. The same accusation befell the Chinese AI startup Deepglint, whose facial recognition technology Sequoia had also invested in in 2014. Both companies were placed on an US sanction lists in 2021. On the other hand, the massive state interventions in China to regulate the local tech industry had made life difficult for Sequoia's portfolio companies in recent years.

Given these circumstances, the announcement of Sequoia's split in June did not come as a surprise. Managing Partner Roelof Botha stated in an interview with the Financial Times that internal discussions about this move had been ongoing for a long time. "It was a really difficult decision. Over the years, we reassessed the cost-benefit ratio of the setup and examined whether it was the right structure for the company." It became clear that the right time had come.

The timing proved to be appropriate. Just a few weeks after the announcement, US President Joe Biden reignited the smoldering conflict with China. In August, he issued an executive order prohibiting US investments in certain Chinese technologies due to concerns that the United States could potentially finance China's military buildup and thereby endanger its own national security. The order affects investments in critical areas such as chip manufacturing, quantum computing, and artificial intelligence.

US private equity and venture capital firms that still wish to invest in China despite geopolitical tensions will inevitably face even more due diligence work. Non-compliance with the new regulations could result not only in legal consequences but also in damage to their reputation.

Perhaps that is why Silicon Valley investor GGV Capital followed suit a few days ago, announcing its upcoming split from its Asian business. The reasoning behind the decision was that the "operational environment has become extremely complex." According to the information service Crunchbase, GGV has been the most active US startup investor in China since 2021, participating in 75 deals, and being the main investor in 28 transactions.

However, an investment that had recently backfired for GGV dates back even further. In 2019, the Sequoia competitor had participated in a funding round for the Chinese facial recognition startup Megvii, alongside the Abu Dhabi sovereign wealth fund. Like DJI and Deepglint, the company, whose software can differentiate faces based on ethnicity, was accused of supporting human rights violations against the Uighur minority.

GGV was questioned by a US congressional committee about this investment in July. Other letters requesting details about specific investments in China were sent to GSR Ventures, Walden International, and Qualcomm Ventures.

Observers now expect US venture capital investors to concentrate even more on their domestic market, potentially causing the flow of venture capital to China to decrease further yet than it already has. According to data provider PitchBook, US investors were involved in only 3.2% of all deals in the Greater China region (China, Taiwan, and Macau) in the first half of the year. A year earlier, it was 4.6%. One of the few larger deals included the $400 million stake acquisition by US private equity firm Bain Capital in the Hongkong-based biorefinery startup Ecoceres.

Other foreign investors have also withdrawn from the Greater China region recently. Only 264 deals were concluded there in the first half of the year with foreign investor participation – the lowest number recorded since data collection began, as per PitchBook.

Perhaps that is why Chinese Premier Li Qiang called for more international cooperation at a World Economic Forum event in Tianjin at the end of June and criticized Western efforts to restrict trade with China. Companies are still best equipped to assess risks, which is why they "should draw their own conclusions and make their own decisions," stated the Prime Minister. On the venture capital front, Sequoia and GGV have now done just that.