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Chinese state-backed funds invest in US tech despite Washington curbs

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Chinese state-backed funds are still scouring the US for investments in critical technologies despite stiffer restrictions on such deals, prompting bipartisan concern in Washington over national security.

Pixelworks, Black Sesame Technologies and LightIC Technologies, three companies in the sensitive US semiconductor sector, have attracted attention in recent months from a group of China’s more than 1,600 so-called government-guided funds. In total, these vehicles are estimated to control more than Rmb4tn ($610bn) in capital, according to Chinese consultancy Zero2IPO.

The US has stepped up scrutiny of Chinese investments over fears that critical technologies and intellectual property could be stolen, with even minority investments deemed a security risk under rules passed in 2018.

Joe Biden, the US president-elect, has promised to continue taking a tough line with China. However, advisers say he will be more likely to listen to the concerns of American tech companies, which argue they have been damaged by the trade war between the world’s two largest economies.

China’s government-guided funds are instructed by the National Development and Reform Commission, the country’s top economic planner, to invest in strategic emerging industries and advanced manufacturing sectors such as semiconductors, an area in which China is determined to catch up with the US.

Two of the semiconductor investments into US companies involve China’s National Integrated Circuit Industry Investment Fund (CICF), which was set up on the orders of the country’s cabinet in 2014 and initially capitalised with $20bn. Its biggest shareholder is the Ministry of Finance.

California-headquartered Pixelworks, which is listed on Nasdaq, said in October that a consortium of Chinese investors, which are linked to the CICF, had acquired a stake. The company, which designs, develops and markets video- and pixel-processing semiconductors, said in a statement that the $6.6m deal “serves as further validation of the interest and expanding opportunity for our technology in the China market”.

In a separate deal, Beijing Xinkin Energy Investment Fund, which is partially owned by the CICF, in September 2019 reported a 1.9 per cent stake in artificial intelligence company Black Sesame Technologies, according to a Chinese government website. The Silicon Valley-based company was founded in 2016 and develops semiconductor chips used in improving vehicle navigation and safety.

Separately, two investors linked to government-guided funds applied last month to take a 16.7 per cent stake in LightIC Technologies, according to a notice posted on a website that is a database of Chinese tenders. The California-based company develops systems that help power robotics and drone navigation.

Chinese venture investments into the US have plunged since Washington beefed up the Committee on Foreign Investment in the US, an inter-agency committee that can block deals on national security grounds, two years ago. The new rules gave Cfius authority to screen any arrangement involving “critical technologies”, such as biotechnology and semiconductors. Previously it could only review deals where control changed hands.

Cfius would not comment on any specific deal.

Chinese venture capital investments into the US nearly halved in 2019 to $2.5bn compared to 2018, according to Rhodium Group, a consultancy. In the first half of this year, Chinese venture investors poured $830m into US start-ups, Rhodium data show.

Adam Lysenko, a US-based analyst at Rhodium, said it was not clear why some investments in apparently sensitive sectors were still taking place. However, he suggested it was possible that some deals had been approved by Cfius but its investigations had not been made public.

“Chinese policy funds often have a mandate to invest globally in any assets that can help achieve their designed ends,” Mr Lysenko added. The CICF “has a vast network of hundreds of onshore subsidiaries and is linked to overseas companies through multiple investments”.

The news of the investments into America’s semiconductor companies drew bipartisan criticism from US senators.

Mark Warner, the Democratic vice-chair of the Senate Intelligence Committee, said a number of US companies that have taken investments from Chinese interests had subsequently had their intellectual property stolen by Beijing-connected companies.

Washington last year accused Huawei, the Chinese technology group, of attempting to steal technology used by T-Mobile, one of its US business partners. The charges are the subject of a Department of Justice case.

“No Chinese company is fully independent from the Chinese Communist party, especially in cutting-edge industries targeted by the regime,” Mr Warner said. He added that US companies must be fully aware of the risks they take in partnering with them.

Ted Cruz, the Republican senator from Texas, said there were still “too many loopholes” in US regulations that allowed such investments.

“The Chinese Communist party uses investment in US tech start-ups to gain access to intellectual property, to manipulate markets, and very often to conduct brazen corporate and state espionage,” Mr Cruz said.

Pixelworks, Black Sesame and LightIC did not respond to requests for comment.

China’s Ministry of Finance and the Ministry of Commerce did not respond to faxed requests for comment. The Ministry of Foreign Affairs said it was “not in possession of the relevant information”.

Additional reporting by Emma Zhou



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Emerging Markets

Bond sell-off roils markets, ex-Petrobras chief hits back, Ghana’s first Covax vaccines

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The yield on the benchmark 10-year Treasury exceeded 1.5 per cent for the first time in a year and the outgoing head of Petrobras warns Brazil’s President Jair Bolsonaro against state controlled fuel prices. Plus, the FT’s Africa editor, David Pilling, discusses the Covax vaccine rollout in low-income countries. 

Wall Street stocks sell off as government bond rout accelerates

https://www.ft.com/content/ea46ee81-89a2-4f23-aeff-2a099c02432c

Ousted Petrobras chief hits back at Bolsonaro 

https://www.ft.com/content/1cd6c9fb-3201-4815-9f4f-61a4f0881856?

Africa will pay more for Russian Covid vaccine than ‘western’ jabs

https://www.ft.com/content/ffe40c7d-c418-4a93-a202-5ee996434de7


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Petrobras/Bolsonaro: bossa boots | Financial Times

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“Brazil is not for beginners.” Composer Tom Jobim’s remark about his homeland stands as a warning to gung-ho foreign investors. Shares in Petrobras have fallen almost a fifth since President Jair Bolsonaro said he would replace the widely respected chief executive of the oil giant.

Firebrand Bolsonaro campaigned on a free-market platform. Now he is reverting to the interventionism of leftist predecessors. It is the latest reminder that a country with huge potential has big political and social problems.

Bolsonaro reacted to fuel protests by pushing for a retired army general to supplant chief executive Roberto Castello Branco, who had refused to lower prices. This is politically advantageous but economically short-sighted.

Fourth-quarter ebitda beat expectations at R$60bn (US$11bn), announced late on Wednesday, a 47 per cent increase on the previous quarter. This partly reflected the reversal of a R$13bn charge for healthcare costs. Investors now have to factor the cost of possible fuel subsidies into forecasts. The last time Petrobras was leaned on, it set the company back about R$60bn (US$24bn at the time). That equates to 40 per cent of forecast ebitda for 2021.

At just over 8 times forward earnings, shares trade at a sharp discount to global peers. Forcing Petrobras to cut fuel prices will make sales of underperforming assets harder to pull off and debt reduction less certain. Bidders may fear the obligation to cap prices will apply to them too.

A booming local stock market, rock bottom interest rates and low levels of foreign debt are giving Bolsonaro scope to spend his way out of the Covid-19 crisis. But the economy remains precarious. Public debt stands at 90 per cent of gross domestic product. The real — at R$5.40 per US dollar — remains near record lows. Brazil’s credit is rated junk by big agencies.

Rising developed market yields will make financings costlier for developing nations such as Brazil. So will high-handed treatment of minority investors. It sends a dire signal when a government with an economic stake of just over a third uses its voting majority to deliver a boardroom coup.

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South Africa’s economy is ‘dangerously overstretched’, officials warn

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South Africa is pushing ahead with plans to shore up its precarious public finances as officials warn the economy is “dangerously overstretched” despite the recent boom in commodity prices.

Finance minister Tito Mboweni hailed “significant improvement” as he delivered the annual budget on Wednesday and said that state debts that will hit 80 per cent of GDP this year will peak below 90 per cent by 2025, lower than initially feared.

But Mboweni warned that President Cyril Ramaphosa’s government was not “swimming in cash” despite a major recent tax windfall. The Treasury now expects to collect almost 100bn rand ($6.8bn) more tax than expected this year after a surge in earnings for miners. This compares with a projected overall tax shortfall of more than 200bn rand. Still, the finance minister made clear that spending cutbacks would be necessary.

“Continuing on the path of fiscal consolidation during the economic fallout was a difficult decision. However, on this, we are resolute,” Mboweni said. “We remain adamant that fiscal prudence is the best way forward. We cannot allow our economy to have feet of clay.”

The pandemic has hit South Africa hardest on the continent, with 1.5m cases recorded despite a tough lockdown. An intense second wave is receding and the first vaccinations of health workers started this month. More than 10bn rand will be allocated to vaccines over the next two years, Mboweni said.

‘We remain adamant that fiscal prudence is the best way forward’ – South African finance minister Tito Mboweni © Sumaya Hisham/Reuters

Even before the pandemic’s economic hit, a decade of stagnant growth, corruption and bailouts for indebted state companies such as the Eskom electricity monopoly rotted away what was once a prudent fiscus compared with its emerging market peers. 

Government spending has grown four per cent a year since 2008, versus 1.5 per cent annual growth in real GDP. The country’s credit rating was cut to junk status last year. Despite this year’s cash boost, the state expects to borrow well over 500bn rand per year over the next few years. The cost to service state debts is set to rise from 232bn rand this year to 338bn rand by 2023, or about 20 cents of every rand in tax.

The fiscal belt-tightening will have implications for South Africa’s spending on health and social services. On Wednesday Mboweni announced below-inflation increases in the social grants that form a safety net for millions of South Africans. “We are actually seeing, for the first time that I can recall, cuts in the social welfare budget,” said Geordin Hill-Lewis, Mboweni’s shadow in the opposition Democratic Alliance.

The finance minister is also facing a battle with union allies of the ruling African National Congress over a plan to cap growth in public sector wages. South Africa lost 1.4m jobs over the past year, according to statistics released this week. The jobless rate — including those discouraged from looking for work — was nearly 43 per cent in the closing months of 2020.

The South African treasury expects the economy to rebound 3.3 per cent this year, after a 7.2 per cent drop last year, and to expand 2.2 per cent and 1.6 per cent next year and in 2023 — growth rates that are widely seen as too low in the long run to sustain healthy public finances.

“The key challenges for South Africa do however persist, clever funding decisions aside,” Razia Khan, chief Middle East and Africa economist for Standard Chartered, said. “Weak structural growth and the Eskom debt overhang must still be addressed.” 



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