Hong Kong government calls US investment ban on Chinese tech ‘unreasonable’, but experts divided over effect on city’s start-ups

Hong Kong authorities have called new US restrictions on investing in sensitive Chinese technologies “unreasonable” measures that will damage normal trade, urging Washington to withdraw rules that “seriously violated” market economy principles.

Lawmakers on Thursday also expressed concerns that Hong Kong tech companies might need to seek alternative funding sources or move their business registration out of the city, given the restrictions applied to the entire country.

But a sector representative and an academic said they were less worried about the ban, noting Hong Kong was not home to technologies deemed a possible threat to the national security of the United States.

Most of the city’s tech businesses were focused on fintech and e-commerce, they added.

The US ban targets Chinese semiconductor and microelectronics manufacturers, along with quantum information technologies and certain artificial intelligence systems. Photo: Reuters

The industry players were assessing the potential implications on the sector, including start-ups, hours after the announcement of the executive order by US President Joe Biden that authorised the US Treasury secretary to prohibit or restrict American investment in mainland China, Hong Kong and Macau in three tech sectors.

They are semiconductors and microelectronics, quantum information technologies and certain artificial intelligence systems. The restrictions apply to “narrow subsets” of the three areas, but the order did not provide specifics, including the date the ban would come into effect.

In a sharply worded statement, the Hong Kong government expressed its “strong objection” to the move.

“The US’ unreasonable and restrictive measure on investment seriously violated the principles of market economy and fair competition, undermined international economic and trade order and jeopardised the economic and business interests of US businesses and the US,” a spokesman said.

“The US should withdraw the unreasonable measure concerned.”

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The US was Hong Kong’s third-largest trading partner in 2022 with the volume reaching US$64.1 billion, while the city was the country’s 29th-biggest trading partner. Hong Kong was also the ninth-largest source of direct investment in the US, amounting to US$17.8 billion, at the end of 2021.

Hong Kong lawmakers Shang Hailong and Johnny Ng Kit-chong cautioned that “quite a number of” Hong Kong start-ups potentially fell under the scope of the executive order, and some might relocate to places such as Singapore with fewer restrictions on fundraising.

Shang is an adviser to Chinese facial recognition giant SenseTime, which delayed its IPO in December 2021 after it was placed on an investment blacklist by the US Treasury over concerns it was linked to surveillance of ethnic minorities in Xinjiang. The company eventually listed at the end of that month, becoming one of the city’s biggest IPOs that year.

“This has already happened to individual companies, so now it is just expanding its scope,” he said. “I believe US investors saw this coming for a while, and as far as I know, lately there have been few so-called successful US investments [in Hong Kong start-ups].”

Lawmaker Shang Hailong says most US investors have been expecting new White House restrictions on investment in China. Photo: May Tse

Ng, who founded tech investment firm Goldford Venture, said the US move would at least undermine the “image” of Hong Kong as a place for start-ups to raise funds.

He worried that when a major funding source such as the US shunned Hong Kong, investors in other Western countries might follow suit, forcing start-ups to seek out alternative sources for backing.

“Apart from the mainland we can tap into new sources, such as the Middle East … some Middle East investors visiting Hong Kong lately have shown keen interest in the start-ups here.”

Shang urged Chief Executive John Lee Ka-chiu to funnel investment into new local ventures through official channels, such as the Co-Investment Fund, a major initiative the leader unveiled in last year’s policy address to attract tech companies and other businesses with strategic development value to the city.

According to an influential private investor who wished to remain anonymous, some local companies would consider moving their business registration to jurisdictions such as the Cayman Islands.

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Mingles Tsoi Ming-to, chief exploration officer at ParticleX, a Hong Kong-based investment firm that currently backs 44 start-ups, said he did not expect a severe blow to local technology-driven enterprises after the US ban came into force.

Some of the ventures in the firm’s portfolio had lead investors or co-backers from the US, but most of these companies did not fall into the three restricted areas, he said.

American venture capitalists were already choosing start-ups focused on artificial intelligence in the US, Canada and Europe over ones in Hong Kong, he added, pointing to a crowded field.

“Having said that, any restrictive sanction policies must have a negative effect on sentiment and affect the freedom of cross-border investment,” he said. “Nevertheless, we as tech investors are more adaptable to this new normal geopolitical factor.”

According to a survey by the government’s InvestHK last year, the majority of nearly 4,000 local start-ups were involved in fintech, followed by e-commerce, supply chain management and logistics technology.

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Yvette To Yee-man, a City University scholar specialising in US-China competition over technology, said that while the immediate impact on Hong Kong companies would be limited, she was more concerned about the reputation of the financial hub’s ability to draw capital from diverse sources.

She said that the US restrictions could prompt other countries including Germany, France and the United Kingdom to move ahead with similar programmes screening outbound investment.

“If restrictions are extended to include more sectors, such as new energy and biotechnology, Hong Kong may lose its attractiveness,” To said. “Certain start-ups may look elsewhere for the capital and expertise they need.”


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