China to restrict US investment in tech companies as AI rivalry intensifies with new controls

China Introduces Capital Controls Targeting US Investment

Chinese regulators plan to restrict US investment in the country's leading tech companies, requiring government approval before Chinese AI companies can accept American capital 3

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. Agencies including the National Development and Reform Commission have instructed several private firms in recent weeks to reject capital of US origin in funding rounds unless explicitly approved 5

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. Among the Chinese AI companies that received this guidance are Moonshot AI, which is considering an initial public offering, and StepFun, both prominent players in China's artificial intelligence sector 3

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ByteDance, the owner of TikTok and one of the country's most valuable startups, has also been told not to approve secondary share sales to US investors without government approval 3

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. The overarching intent of these restrictions is to prevent US investors from taking stakes in sensitive sectors where national security is a priority 3

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Meta's Manus Acquisition Triggers Regulatory Response

The new capital controls stem from Meta Platforms Inc.'s $2 billion acquisition of Manus, a maker of AI software that relocated from China to Singapore before the deal 2

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. The acquisition triggered a Beijing probe into illegal foreign investment and tech exports shortly after its December announcement 3

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. Chinese regulators have ordered Meta to unwind the deal, viewing it as a "conspiratorial" attempt to spirit valuable technology abroad 2

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Manus was launched in March 2025 as a general AI agent capable of automating complex tasks, and its parent company Butterfly Effect raised $75 million in a round led by Silicon Valley's Benchmark, valuing it at $500 million 3

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. The company relocated its China-based staff to Singapore in July, cutting dozens of roles in the process, before Meta announced the acquisition in December after Manus surpassed $100 million in annualized revenue 3

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24-Hour Escalation in US-China AI Rivalry

The timing of China's reported restrictions is significant. Just 24 hours before the Bloomberg report, the Trump administration announced it would crack down on foreign technology companies "exploiting" US AI models through model distillation 4

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. White House Director of Science and Technology Policy Michael Kratsios framed the move as the first major US government response to complaints from Silicon Valley that Chinese developers have been using open-source or commercially accessible US AI models as training data to build rival systems 4

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This represents a 24-hour escalation in which both governments moved simultaneously to sever remaining channels of AI technology and capital transfer 4

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. The US is trying to prevent its AI models from being used to train Chinese competitors, while China aims to prevent American money from flowing into its AI national champions without state oversight 4

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China's Competitive Edge Despite Hardware Restrictions

Despite lacking access to cutting-edge chips due to export controls, Chinese AI companies like DeepSeek and Alibaba have focused on devising systems that perform almost on par with top-performing AI models without needing the most powerful hardware 1

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. Export controls imposed by Washington restrict China's access to US-designed chips that are around 20% faster and consume as much as 30% less power than their Chinese competitors 1

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Chinese developers have overcome this handicap by employing techniques such as mixture of experts, where models activate specialized sub-networks that engage only a fraction of available computational capacity 1

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. With DeepSeek's latest model, V4-Pro, less than 3% of its parameters are actually doing work at any given moment 1

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. DeepSeek and Moonshot now feature among the top 12 AI models according to LiveBench's large language model rankings, and they are far cheaper: OpenAI's GPT-5.2 cost $14 per million output tokens as of February, around 33 times more than DeepSeek's V3.2-Exp at 42 US cents per million tokens 1

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Implications for Venture Capital and Foreign Investment

The new restrictions risk further isolating China's recovering tech sector from the venture backing that has underpinned it for two decades, much of which was sourced from American pensions and endowments 3

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. Private investment in AI companies in the US reached $286 billion in 2025, according to Stanford University, while China mustered just $12.4 billion 2

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The backdrop to China's reported capital controls is the existing US outbound investment rule that came into effect on January 2, 2025, which prohibits US persons from making equity investments in Chinese companies engaged in advanced semiconductors, quantum computing, or certain AI systems without Treasury Department approval 4

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. China's reported plan is the inbound mirror of that US rule, requiring government approval before Chinese AI companies accept capital from the country that has also been restricting chip exports to China since 2022 4

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If the approval requirement is implemented, it would add a formal layer of Chinese government oversight to any US venture capital investment in these companies, potentially chilling investment further or driving more of China AI capital formation through domestic channels 4

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. What neither measure resolves is the underlying dynamic: China's AI capabilities are improving faster than export controls are degrading them, with the capability gap between US and Chinese models narrowing rather than widening 4

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