China rejects claims it blocks startup funds but foreign capital continues to exit Chinese data centers

China has denied claims that it is discouraging local tech companies from taking foreign investment, despite continued withdrawals by international investors from major sectors.

Li Chao, a National Development and Reform Commission official, stated on May 22 that the government has never instructed Chinese IT companies to steer clear of foreign funding.

He continued by saying that China is in favor of international collaboration and intends to continue opening its economy to foreign companies and investment.

Meta deal blocked amid security concerns

According to reports, Chinese regulators had discreetly instructed local tech companies to refuse US money unless they first obtained government approval.

ByteDance and AI startups Moonshot AI and StepFun were among the businesses listed.

Concerns grew after the commission said in late April that it had blocked Meta Platforms from acquiring the $2 billion AI startup Manus.

Although Manus is registered in Singapore, its products are made in mainland China.

Citing national security risks, the regulator ordered the deal to be canceled.

Following this, Manus is now reportedly trying to raise nearly $1 billion from external investors to comply with Beijing’s requirement to reverse the takeover.

This unofficial guidance, which falls between official policy and administrative counsel, is frequently referred to as “window guidance” in Chinese regulatory practice.

In addition to monitoring cross-border transactions for threats to national security, the commission is in charge of the Negative List for Market Access, which places restrictions on foreign investment in specific industries.

According to Li, foreign investment must abide by Chinese law and not jeopardize national security or other interests.

Beijing maintains that it is not shutting down the market, but the national security approval procedure is still erratic, making it challenging for foreign investors to determine what degree of participation is appropriate.

International investors are wary of regulatory risks because the commission’s actions have sent mixed signals, despite its claims to support international investment.

Foreign investors exit China’s data center sector

After years of investing heavily in China’s cloud computing sector, foreign private equity firms are now divesting from the data center industry.

Growing political and regulatory pressures are making it increasingly hard for overseas investors to maintain control over digital infrastructure.

Princeton Digital Group, which has backing from Warburg Pincus, is putting its China assets up for sale in a deal that could bring in as much as $1 billion, according to three sources.

A sale of the group, which owns data centers in six Chinese cities, would basically end a ten-year effort by global buyout firms to invest directly in China’s digital infrastructure.

Major private equity firms like Bain Capital, Warburg Pincus, and The Carlyle Group began making significant investments in China’s data center sector in 2017.

With the expectation of steady, infrastructure-like long-term returns, they were drawn to the growing demand from cloud providers associated with Alibaba, Tencent, and ByteDance.

However, Beijing’s tougher cybersecurity and data management regulations have made foreign ownership of crucial digital infrastructure more delicate and challenging, even though China’s cloud industry is still expanding.

Several international investment funds have already exited due to this shift, selling their stakes to domestic investors.

Last year, Bain sold its Chinese data centre assets for $4 billion to a consortium led by Shenzhen Dongyangguang Industry, while keeping Bridge Data Centers outside China.

Similarly, Carlyle has gradually reduced its exposure over the past two years after investing in VNET Group in 2020.

It did so through refinancing supported by state-backed funds, and fully exited when CATL acquired the company.

Global private equity firms are shifting billions of dollars into other Asian economies, including Malaysia, Japan, and India, as they withdraw from China’s data center industry.

These nations are becoming more appealing for long-term investment due to strong AI-driven demand and more stable legislation.

Despite China’s assertions that it welcomes international investment, stricter cybersecurity laws and restrictions on IT transactions have alarmed foreign businesses.

Many firms now see owning sensitive infrastructure in China as too risky and are moving their investments elsewhere.

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