The dilemma of the China-shedding strategy

Global investment giants face a risky balancing act as they create separate Asian operations to clearly delineate their China exposure from the rest of Asia

By Ivy Yang

Following the relocation of several global Chinese companies’ headquarters out of China, leading private equity and venture capital firms like Hillhouse Capital and GGV have been expanding their non-Chinese Asian operations. Their aim with this strategic shift appears to be to mitigate the risks associated with rising geopolitical tensions between Beijing and Washington.

But it prompts a crucial question: Can this “China-shedding strategy” adequately address the firms’ complex challenges, or might it lead to unintended consequences, given their still substantial assets and investments in China?

Over the past year, high-profile Chinese companies in the U.S. have been expanding beyond China, motivated by government policy directives and slower growth at home, and are actively rebranding themselves to shed their China affiliation. These companies compete in sectors traditionally dominated by U.S. firms and have been attracting media attention and regulatory scrutiny. To better align themselves with global markets and reduce their perceived connections to China, they’ve been redefining their domiciles, while attempting to address national security concerns and hone their reputations.

Online retailer PDD’s  (PDD.US) successful cross-border e-commerce company Temu, has deleted mention of its parent company and now describes itself as “founded in Boston.” Its rival Shein has moved its headquarters to Singapore and has been acquiring stakes in companies like Forever 21 in anticipation of a U.S. initial public offering. TikTok has invested heavily in initiatives like Project Texas to build infrastructure in the U.S. to ensure its data is stored and managed independently of ByteDance, its parent company in Beijing. 

Now, major funds with deep ties and track records in China have also started looking for opportunities beyond their China operations. In years gone by, these funds have achieved outsized success in helping U.S. shareholders get into some of China’s most successful, newly minted “global companies.” Still they, too, are reconsidering their China strategy amid geopolitical tensions.

The China funds

Among ByteDance’s investor roster, giants such as Sequoia, GGV, and Hillhouse Capital have flourished through their investments in Chinese technology and e-commerce companies over the past two decades, capitalizing on China’s remarkable economic growth. Following Sequoia’s  three-way split last year, Sequoia China, also known as HongShan, has publicly committed to continuing its focus on domestic investments in China and supporting Chinese founders, including their efforts to go global.

Meanwhile, GGV and Hillhouse — well-known for their investments in the likes of JD.com (JD.US; 9618.HK), Tencent (0700.HK), and Alibaba (BABA.US; 9988.HK) — have revamped their China-centric investment thesis. GGV Capital restructured in September 2023 into separate GGV Capital U.S., focused on U.S.-based investing, and GGV Capital Asia, focused on that region and based in Singapore. Hillhouse’s HH Capital Investment too has registered its funds in Singapore, relocated its senior executives and expanded its office there since 2022.

The shift reflects their objective to address the geopolitical landscape and growing concerns in the U.S. about investment in Chinese technology firms, especially considering GGV’s and Hillhouse’s large and crucial American limited partnership bases, which include pension funds, endowments, and other public institutional investors. Hillhouse, in particular, began with a $20 million seed investment from the Yale University’s Endowment in 2005 and has since grown into a $100 billion powerhouse.

The funds’ “China shedding strategy”

GGV and Hillhouse have each restructured their operations in Asia.

The majority of limited partners in Hillhouse and GGV are pension funds, endowments and other institutional investors. These large allocators are reconsidering their exposure to China and halting new investment strategies in the country to mitigate risks and economic uncertainty. The administration of U.S. President Joe Biden’s introduction of new restrictions on U.S. investments in China’s advanced technology industries has further reinforced the rationale for major investors to shift away from China.

GGV Capital has been an active investor in artificial intelligence and has invested in Chinese companies like Megvii, an AI facial recognition software company now on the U.S. Entity List, which makes it difficult for it to do business with American companies. GGV is among a small group of funds that received a letter from the U.S. Select Committee on the Chinese Communist Party (CCP) seeking details about its investments in AI, chips, and quantum computing in China. Coupled with Biden’s new regulations, GGV capital has restructured into two independent firms, one based in the U.S. and the other based in Asia.

The timing of Hillhouse’s repositioning coincides with its fundraising cycle. After its record private equity raise four years ago, its public equity performance since then has been affected by broader macro and market factors. The appeal of public markets as the primary exit strategy is fading due to the evolution of the IPO process and a fundamental shift away from public to private capital. According to U.S. regulatory filings, Hillhouse’s public investment arm, HHLR Advisors, saw its assets tumble by a third in value last year. The assets of Hillhouse Investment Management Ltd., which focuses on less liquid investments, grew by just 2.2% to $44.7 billion over the same period. There has also been a slowdown in investment activity: Hillhouse’s venture capital and private equity deals dropped to 61 in 2022, a significant decrease from 238 the year before.

The reputation risk of not being Chinese and playing both sides

Yet as these Chinese companies attempt to fix perceptions of themselves in the U.S., they face potential long-term reputational risks with the Chinese government as they try to distance themselves from their Chinese identity.

Hillhouse is hedging against this perception. Before moving two of its SEC-registered units to Singapore, it completed the first closing of a yuan-denominated carbon-neutral industry investment fund, totaling over 4 billion yuan ($600 million). This could be seen as an effort to remain aligned with China’s broader goals and demonstrate continued commitment to the country.

Will Hillhouse’s new attempt to play both sides help or hinder its future success?

The firm has achieved some notable international investments, including its $3.7 billion acquisition of the home appliances unit of Dutch electronics giant Philips (PHG.AS). According to The Information, Hillhouse has also struck deals to form Chinese joint ventures with foreign companies such as U.S. healthcare provider Mayo Clinic and U.S. coffee chain Peet’s Coffee to help them expand into China.

Even with these “wins” under its belt, Hillhouse is still fundraising on the basis of its China expertise. It’s in the process of raising a multibillion-dollar fund that targets undervalued Chinese stocks, an opportunistic move that goes against the Chinese government’s efforts to bolster real economic productivity. The move also suggests that Hillhouse is not ready to shift its focus entirely away from China just yet.

In the context of U.S.-China geopolitical tensions and the changing landscape of globalization, funds like GGV Capital Asia and Hillhouse and companies like Temu, Shein, and TikTok will find themselves at a crossroads, juggling vastly different priorities. They will have to find a way to balance ties to China with their global aspirations and navigate regulatory demands and investor expectations.

Their ability to build new track records and access core strengths will be pivotal. Doing so will secure their success in target markets, redefine their corporate identities, and set new standards for global business and investment practices.

Ivy Yang is the founder of Wavelet Strategy, a New York-based communications and reputation management company, and also writes a Financial Times Chinese column. You can reach her at

ivy@waveletnyc.com

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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