US President Joe Biden has issued an executive order restricting US capital from being invested in three technology categories in China: quantum computing, advanced semiconductors, and artificial intelligence related to military usage.

The geopolitical brake on US capital to China is not an entirely new idea. The current US technology blockade can be summarized in three aspects: first, the export controls announced in October 2022 aimed at limiting China's ability to acquire advanced computing chips, develop supercomputers, and manufacture advanced semiconductors; second, the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes inbound investment on the basis of national interest. Both of these measures hinder the flow of capital into specific technology sectors in the US, hence the third measure targets the flow of US capital into China.

Currently, some companies with ties to the Chinese military are off-limits to US investors. The CHIPS and Science Act also prohibits companies that receive subsidies from making investments that could benefit China's semiconductor industry. Therefore, Biden's latest outbound investment rules are a natural extension of the third point of the blockade.

The executive order classifies China, including the Hong Kong and Macao special administrative regions, under "countries of concern". I believe that the activities of US funds, particularly private equity and venture capital (VC) funds, in these three markets will be significantly impacted following the implementation of the new rules. Moreover, advanced technology transfers and the formation of joint ventures will face restrictions. Taking a risk-averse approach, these US funds will withdraw gradually from the Chinese market. Sequoia, a major American VC firm, announced that it would split off its Chinese business by 2024.

VC investment from the US into China has been declining in recent years. Its value has plunged by more than 80 percent since peaking at approximately $20 billion in 2018. China's innovation and technology (I&T) sector has been struggling in a severe VC winter since the COVID-19 pandemic, and has yet to show signs of recovery. Funding from the real estate sector has almost dried up. State capital has become more cautious, making it difficult for fund companies to raise capital. The slowdown in initial public offerings, along with the downturn in stock markets, has also limited the exit strategies of many funds, thereby undermining their ability to recoup capital and investment performance.

Biden's latest executive order burdens US investors further with overbroad rules. Assistant Secretary of the Treasury for Investment Security Paul Rosen said that the rules would focus on "investment dollars that come with know-how and expertise". However, with the rapid development of technology, it is difficult to define precisely what constitutes "technological know-how" and the scope of permissible investment. Furthermore, under the Biden administration, economic and national security policies have increasingly become indistinguishable. As the Sino-US rivalry intensifies, the list of prohibited technologies will likely expand. Consequently, the new regulations will discourage US companies seeking to invest in China's I&T sector.

Under such circumstances, can China's capital fill the gap left by the withdrawal of US capital? It is imperative that it should do so. Technological self-reliance is at the heart of the national development strategies of China. To sustain its competitiveness, it is crucial for China to possess cutting-edge technologies. Sufficient funding is necessary to support all stages of I&T development, such as the nurturing of talent, infrastructure, research and development, and commercialization. Therefore, the role of professional investors is indispensable. Given the withdrawal of US capital, developing indigenous funding sources is our undoubted direction.

An undeniable fact is that US capital has led I&T investment in China since the emergence of its internet industry in the 1990s. Over the past decade, many investment funds have been established with the aid of government-led funds, fund of funds and State-owned funds. However, the quality of their investment teams varies. Despite stunning returns during the past time of the tech boom and crazy valuations, some investment managers have never experienced economic downturns. Greed made them forget the principle of long-term investment. They poured money into startups, which expanded their customer base by cash burning, eager for quick revenue through initial public offering exits. They disregarded the true value of a tech enterprise, which lies in its research and development capability, technical know-how, product and creativity.

After two years of VC winter, I estimate that those surviving funds have a more solid foundation, among which Hong Kong's investment teams are the highlight. Over the years, Hong Kong has accumulated numerous talents in finance and investment management, including fund managers specializing in various stages of VC financing. In general, Hong Kong teams are more risk-aware, with more prudent investment analyses and world-class management mechanisms. Therefore, they are particularly capable of seizing the opportunity of the retreat of the US capital. Nowadays, European family offices have invested in many Hong Kong funds. They also actively attract Middle East investors and play a positive role in channeling capital from other countries.

The central authorities indicated clear support for Hong Kong's development as an international I&T hub. In fact, Hong Kong ought to establish itself as an international I&T funding center first. With the withdrawal of US capital, the SAR government should seize the opportunity to attract tech-focused private investors, and nurture our local fund teams. Meanwhile, gatekeeping should be put in place to filter out those without prior experience in economic cycles and a global perspective. We should support those talents who agree with our country's development strategies and are able to explore the technological value of enterprises.

During the past two years, the Legislative Council has passed regulations that offer tax concessions for carried interest and family-owned investment holding vehicles. However, these appear to be insufficient to attract major funds to relocate to Hong Kong. Additional preferential policies are required to achieve a breakthrough. The government can take the lead in establishing a fund of funds that acts as a limited partner and invests in other private investment funds focused on technology and early-stage investment. Besides, by properly opening up the capital account and loosening capital outflow controls, mainland capital will enhance liquidity in Hong Kong's fund industry.

In conclusion, Biden's new restriction signals an all-encompassing tech blockade against China. Hong Kong can contribute to our country's pursuit of technological self-reliance by leveraging its expertise in tech-focused investment funds. As long as the government improves the talent pool, enhances the local fund regulations, and introduces simple and clear preferential policies, Hong Kong can become another center for venture capital in the world, providing indigenous funding sources for the nation's technology development.

The views do not necessarily reflect those of China Daily.