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We Must Not Fund Our Own Destruction

By Mike Dodd

Dioltas Founder and Advisory Board Chairman

If the headline sounds ominous, that’s by design. This is not hyperbole. The United States is funding numerous Chinese companies—many with ties to the Chinese Communist Party (CCP) and the Chinese military. This is the very country that, by all accounts, is posing the most serious threat to our national security in our lifetime.

Over the years, we’ve learned of public employee retirement funds from Delaware to Michigan, California to New Jersey—investing in Chinese technology companies that produce everything from drones to Artificial Intelligence (AI) algorithms. Unlike in the U.S., where there are clear delineations between the private and public sectors, in China, those distinctions don’t apply and technology being developed by so-called private industry is, in many cases, being applied directly to the military.

"If American capital continues to flow to Chinese military companies, we are at risk of funding our own destruction," said Rep. Mike Gallagher (R-Wisconsin), who is chairman of the House Select Committee on the Chinese Communist Party.

He estimates US private investments in China top $200 billion, with a sizable portion of that money going directly to tech companies with ties to the CCP and Chinese military. Gallagher knows what he’s talking about. He holds a Ph.D. in government and international relations from Georgetown University, three master’s degrees in government and security studies, and was twice deployed to Iraq as a U.S. Marine Corps intelligence officer.

If U.S. investment in China wasn’t enough, at the same time, Chinese companies are investing billions in U.S. industry. For example, from 2011 to 2018, Chinese state-owned and private firms invested nearly $25 billion in acquiring U.S. technology companies focused on information, communications, and energy. China has prioritized technology transfer of intellectual property from these U.S. companies to China. According to a U.S.-China Economic and Security Review Commission report, “Chinese acquisition attempts frequently target advanced technologies… (that) …could provide dual military and civilian capabilities in the future.”

But don’t think this story is all doom and gloom. America is fighting back.

Last year, the Department of Defense (DoD) established the Office of Strategic Capital (OSC) with two main goals: identify and prioritize promising critical technology for national security and then fund investments in those technology areas.OSC leverages loans, loan guarantees, and equity investments to attract and scale private capital into critical technologies. These funding sources are vetted to ensure they aren’t influenced by bad actors.

In 2019, DoD established National Security Innovation Capital (NSIC), which identifies companies developing cutting-edge, dual-use hardware solutions, critical to national security. NSIC then awards funding via Other Transaction Authority (OTA) agreements to the companies, thereby addressing the shortfall of private investment from trusted sources. NSIC focuses on autonomy, communications, power, sensors and space.

Additionally, the Committee on Foreign Investment in the United States (CFIUS), led by the Department of the Treasury, is an interagency committee authorized to review proposed foreign mergers and acquisitions to determine if they raise national security concerns. It also has oversight over non-buyout scenarios to evaluate for national security concerns.

Policymakers are also stepping up. Rep. Jim Banks (R-Indiana) has introduced legislation that would prevent the Thrift Savings Plans (TSP), a federal retirement fund, from Chinese and other adversarial investments.

The Indiana State Legislature recently ordered the Indiana Public Retirement System (INPRS) to divest all its holdings that are closely associated with the People's Republic of China or the Chinese Communist Party—totaling nearly a billion dollars.

The Biden administration also gets credit for a recent executive order prohibiting U.S. investment in China, specifically in the areas of in AI, quantum computing and advanced semiconductors specifically designed for military or intelligence uses. This order builds on prior restrictions of U.S. exports of advanced chips and semiconductor-manufacturing equipment to China. However, as the Wall Street Journal pointed out, the measures still leave plenty of room for investment that puts America at risk.

The business community is also taking measures. U.S. investment in Chinese startups dropped by more than 30% from 2021 to 2022. U.S. investment in Chinese venture funds fell by nearly 80% between the first quarter of 2019 and this year.

There’s little chance that the U.S. will completely decouple from the Chinese economy, however, we need to realize our dependency on cheap Chinese goods and investment opportunities comes with a price. We need to have our eyes wide open knowing the Chinese—whether accepting funds from U.S. investors or investing in American companies, are looking for much more than economic prosperity.

As the great investor and billionaire Warren Buffett once said, “In the business world, the rearview mirror is always clearer than the windshield." However, when dealing with China and everything that’s at stake for the United States, we need to continuously clear off the windshield and take a long, hard look.


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