When tech-sector focused Silicon Valley Bank collapsed last week, among those left in the lurch were several prominent Chinese startups that had come to rely on the bank as a connector between the U.S. and their domestic financial system.

Since SVB’s sudden downfall, a flurry of Chinese businesses mostly focused on biotech — including Jacobio Pharmaceuticals, BeiGene and Andon Health — have disclosed that they had deposits in the bank. Brii Biosciences, a Beijing-based developer of therapies for infectious diseases, announced that it had “less than 9 percent of its total cash and bank balances” in SVB. 

No Chinese businesses have disclosed that they expect a negative impact — especially after the U.S.’s Federal Deposit Insurance Corp decided on Sunday that it would ensure that all SVB depositors were made whole — they will still have to find a new bank to keep their cash safe. SVB had become popular among Chinese companies, particularly those with international footprints, as a place to park money raised from U.S. investors, outside of China’s strict capital controls.

A lot of Chinese startups think of Silicon Valley as a place to find ideas and capital. SVB shows the interconnectedness of this.

Liqian Ren, director of modern alpha at New York-based WisdomTree Asset Management

The fact that a bank’s failure in northern California has ramifications for such firms underscores how the U.S. and China’s technological and financial sectors remain deeply intertwined, despite intensifying scrutiny in Washington on the connection between the respective markets. As recently as 2020, U.S. venture capital firms poured $2.5 billion into Chinese firms in a single year, according data compiled by the Rhodium Group. 

“Silicon Valley is still a center of activity for both the U.S. and China for the investor ecosystem. A lot of Chinese startups think of Silicon Valley as a place to find ideas and capital,” says Liqian Ren, director of modern alpha at New York-based WisdomTree Asset Management. “SVB shows the interconnectedness of this.”

SVB, which was founded in 1983, was known for making banking accessible to startups, which often struggle to secure services from bigger institutions. The bank’s sudden failure followed a failed attempt to raise capital to cover losses on its investments in long term government bonds, which then sparked a rush among depositors to withdraw their funds.

SVB had started catering to the Chinese market decades ago. The bank opened its first subsidiary in China in 2005, and seven years later, it opened a joint venture with the state-owned Shanghai Pudong Development Bank (SPD) with the aim of providing banking services for Chinese technology startups. 

“We’re on the top floor of the Park Hyatt Shanghai, the tallest hotel in the world,” said Greg Becker, SVB’s former chief executive, in a Stanford Business School case study published in 2015, recalling the moment the bank’s board decided to seize the opportunity presented by the joint venture. “And at the end [of the discussion] it was the conclusion by almost everyone—we really don’t have a choice but to do this.” The joint venture’s current chairman is Zheng Yang, a former financial regulator in Shanghai, while its president is Jade Lu, a longtime Chinese banking executive.

Now, however, SPD Silicon Valley Bank’s fate is uncertain. Though it has maintained in recent days that it operates a separate balance sheet from SVB, it appears likely either that SPD will take over complete ownership, or that another foreign firm will buy out SVB’s 50 percent stake. HBSC acquired SVB’s subsidiary in the U.K. on Monday for $1. 

Despite the high hopes at the launch of SPD Silicon Valley Bank, it has achieved limited success. The joint venture, which did not respond to requests for comment, had a net profit of $7.4 million in 2021. Even if it adapted its business after a potential acquisition, it likely wouldn’t have a big impact on the Chinese technology industry — other Chinese banks, like Tencent-backed WeBank, also specialize in serving startups.

Chinese companies that did business with SVB in the U.S. also have plenty of options as they join the rush to find a new bank. But SVB’s collapse may make firms think twice before relying on smaller, regional banks. “There is a shift going on,” says Chen Zhiwu, a finance professor at the University of Hong Kong. “Everyone I know has been moving money from small banks into big ones.” Chen says that some of the companies he advises are concerned about this transition, fearing that they may not get the sort of specialized or preferential service from large banks that they enjoyed with SVB.

Still, Chinese companies will be keen to find new homes in the U.S. for money raised from the country’s venture capital firms. Those that previously banked with SVB did so in part to ensure they could operate overseas subsidiaries, or pay employees outside of China. Having an SVB account also meant they could also keep funds there while they went through the administrative process of moving some of the money raised in the U.S. back into China. 

Why do these guys come to the Valley? That tells you something about the Chinese financial system right there. It is not built to finance startups.

Carl Walter, former chief operating officer at JP Morgan China and co-author of Red Capitalism

It is not yet clear to what extent Chinese founders were using SVB for their personal accounts, in the same way that U.S. technology executives did. “There are many Chinese billionaires who now live in California,” Chen says. “They probably park some of their money in SVB. That would not surprise me at all.”

American politicians are increasingly scrutinizing U.S.-China investment flows. The Biden administration has plans to release an executive order to screen outbound investment due to national security concerns. This week, China hawks like Sen. Tom Cotton, the Arkansas Republican, have tried to publicize SVB’s China connections. “It’s well known that SVB funneled American money into Chinese companies,” Cotton tweeted on Monday.

Despite this attention, Chinese firms are still likely to carry on seeking U.S. funding, experts say. 

“Why do these guys come to the Valley?” says Carl Walter, former chief operating officer at JP Morgan China and co-author of Red Capitalism. “That tells you something about the Chinese financial system right there. It is not built to finance startups.” He adds that events like the recent arrest of Bao Fan, who ran China Renaissance and was one of the most high profile tech bankers in China until he was detained last month, will do little to help the Chinese investment ecosystem’s growth.

Beyond the impact on individual Chinese companies, experts say that the SVB crisis may diminish Chinese views of the stability of the U.S. financial system, as the 2008 financial crisis did over a decade ago. “It was taken first of all as another example of how bad American capitalism is,” says HKU’s Chen. “CCTV and other media have been having a great time reporting on it.”

A piece published on Sunday in the Global Times, a nationalist state-run outlet in China, argued that the failure was a comeuppance for the U.S.’s “irresponsible” monetary policy. The headline says it all: “Beware, global investors! Don’t let U.S. banks devour your cash”.

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