Primavera Capital chairman warns of financial war with Washington

China’s biggest weakness in competition with the United States is not AI, semiconductors, or tariffs. According to one of the financiers who helped open China’s markets to Wall Street, it’s finance.

Fred Hu, a former Goldman Sachs executive who helped engineer the firm’s landmark investment in Industrial and Commercial Bank of China before founding Primavera Capital, said China’s financial system has become a “short plan” for the country as investment ties between the U.S. and China deepen.

Hu’s private equity firm has backed several of China’s high-tech and consumer conglomerates, including: alibabaByteDance, Yum China, and ride-hailing company Didi Chuxing.

Hu also served as Henry Paulson’s chief adviser on China when the former U.S. Treasury secretary was CEO of Goldman Sachs, and was a trusted advisor to reform-minded officials under then-Premier Zhu Rongji.

As U.S.-China competition extends beyond technology to the capital that fuels it, Washington is restricting U.S. investment in Chinese companies developing sensitive technologies, while Beijing seeks to limit U.S. funding for some of the most promising startups. President Hu argues that financial decoupling may come at a cost.

Following Beijing’s withdrawal order, Chinese regulators plan to restrict private tech companies from accepting U.S. capital without government approval meta platform Acquisition of high-profile startup Manus. The US government also prohibits pension funds and university endowments from investing in Chinese companies that develop sensitive technology. Listings by Chinese companies in the United States are also fraught with political problems in both countries.

Hu, who manages about $20 billion in assets, said U.S. private equity funds have weathered massive competition largely unscathed, while their Chinese peers are under pressure from both sides.

“Finance remains scarce for China,” he told CNBC in Singapore last week, compared to the deep pool of capital in the United States. “Blackstone can do without China, but Chinese private equity funds are still heavily dependent on the US for funding,” he said.

The U.S. stock market is worth about $75 trillion, while China and Hong Kong’s combined market value is more than $22 trillion, and there are thousands of pension funds that can be tapped by private funds like Hu’s.

China’s state funds are typically small and dispersed among local governments, and the Chinese government has a tight grip on the country’s vast household savings, which can fill the void left by the withdrawal of U.S. capital.

“China’s startup ecosystem has lost a major source of funding as US investors have been hampered by regulatory risks in Washington,” said Kyle Zhang, a research fellow at the Brookings Institution, a Washington-based think tank.

He expects further tightening of US restrictions on US capital flowing into China.

The Chinese government has never wanted the Wall Street model.

“Capital is a vital resource and the Chinese government does not want to relinquish control of it,” Zhang said. Chinese policymakers see the U.S. economy as being driven by private finance, which is at odds with the party-state’s intention to set the overall direction of policy itself, Zhang added.

China’s financial system is at the heart of Beijing’s technology and industrial ambitions, pouring huge amounts of money into strategic areas such as electric vehicles, artificial intelligence and renewable energy.

Private equity and venture capital activity remains well below its 2021 peak, in part because public capital has squeezed out private investors, Rhodium Group said. We estimate that government-led funds contributed 81% of new capital last year, up from 65% in 2019. “Rather than retreating, the Chinese government is tightening its control over both public and private resource allocation,” the research firm said.

Rodium warns that while this approach may advance industry goals in the short term, it is likely to exacerbate wasteful spending and economic inefficiency in the long term.

Primavera’s Hu said China has the capital to foster more homegrown high-tech companies and help transform traditional industries, but few renminbi funds have been set up to play a meaningful role in trading and corporate restructuring.

The country’s national savings rate remains close to 43% of GDP, more than double the U.S. savings rate of about 18%, and household assets will reach 167 trillion yuan ($24.6 trillion) by the end of 2025.

“Households overwhelmingly prefer real estate, bank deposits and guaranteed products over venture investments,” said Han Sheng Lin, China managing director at Washington-based advisory firm Asia Group.

All this idle cash is indicative of what Hu has called an “undeveloped” financial system. Chinese households are unable to freely invest overseas, and domestic real estate and stocks have plummeted, while the country’s fund managers are struggling to raise funds in the domestic market.

China’s securities regulators this year tightened the reins on mainland investors channeling money into overseas stocks as part of a broader effort to block capital outflows through official channels that increase Beijing’s visibility and control.

Chinese fund managers are increasingly turning to Middle East sovereign wealth investors for funding, but the Gulf region’s capital pool is much smaller than that in the United States and shallower than China’s own wealth stash, Hu said.

“Ultimately, the Chinese government’s biggest constraint is its own fear of relinquishing control of its capital resources,” Zhang said.

Mr. Hu is not a habitual critic of China, describing himself as deeply patriotic and believing that China’s leadership remains fully committed to reform and opening up. Primavera frequently holds small gatherings to attract wary Western executives and institutional investors to visit the country’s robotics companies, battery makers and electric car factories.

In 2010, when Mr. Hu’s name was floated as a candidate for a senior position at the People’s Bank of China, he chose Mr. Primavera instead. Asked about the decision, Hu said that despite his passion for public policy, a subject he rarely addresses in public, his life and education had enabled him to serve as a bridge between China and the West outside the system.

Hu remains optimistic about investing in China, even in the depressed consumer sector, but the returns are now demanding more from fund managers. He said solid brands and business models can still create value, and profits can be made by tightening distribution and controlling costs rather than waiting for an upturn.

Demand is slowly recovering, Hu said, citing two indicators to assess the recovery in confidence: whether this summer’s college graduates have found jobs and whether the real estate market has found a bottom.

Hu said that to encourage consumers to spend, the government needs to act on three fronts. One is solid, transparent policies that give certainty to the private sector, a stronger social safety net, and a restructuring of the consumer credit market (which has shrunk since regulators forced Ant to restructure its lending arm) so that spending no longer relies solely on savings.

Primavera’s funding is invested in AI at many levels, including developers of large-scale language models, physical AI such as robotics and automation, and energy infrastructure such as wind and battery storage to keep data centers powered.

The company is also betting on upgrading traditional industries such as healthcare, education and manufacturing to add value with technology.