Primavera Capital chairman warns against financial war with Washington

China’s biggest weakness in its rivalry with the United States isn’t AI, semiconductors or tariffs. It’s finance, according to one of the financiers who helped open China’s markets to Wall Street.

Fred Hu, the former Goldman Sachs executive who helped engineer the firm’s landmark investment in Industrial and Commercial Bank of China before founding Primavera Capital, says Beijing’s financial system has become the country’s “short plank” as Washington and Beijing increasingly sever investment ties.

Hu’s private equity firm has backed several of the China’s tech and consumer conglomerates, including Alibaba, ByteDance, Yum China and ride-hailing firm Didi Chuxing. 

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

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

Chinese regulators have planned to restrict private tech firms from accepting U.S. capital without government approval, after Beijing ordered to reverse Meta Platform’s high-profile acquisition of startup Manus. Washington also bars its pension funds and college endowments from investing into Chinese firms developing sensitive technologies. Listings by Chinese firms in the U.S. have also become politically fraught in both countries.

American private equity funds have largely sailed through the sweeping rivalry unscathed, but Chinese peers have been squeezed from both ends, said Hu, whose firm manages about $20 billion in assets.

Compared with the deep capital pool in the U.S., “finance is still China’s short plank,” he told CNBC in Singapore last week. “Blackstone can do without China. But China’s private equity funds still rely heavily on the U.S. in fund raising,” he said.

The U.S. stock market is worth roughly $75 trillion, against $22-odd trillion for China and Hong Kong combined, with thousands of pension funds available for private funds like Hu’s to tap into.

Chinese state funds are usually small and scattered across local governments, with Beijing keeping a firm grip on the country’s massive pool of household savings that could otherwise fill the gap left by the retreating U.S. capital.

“With U.S. investors deterred by regulatory risk from Washington, China’s startup ecosystem has lost a major source of capital. Chinese PE and VC shops can only fill a small fraction of the gap left behind,” said Kyle Chan, a fellow at Brookings Institution, a…