US blacklist puts China AI into local mode

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HONG KONG, Dec 14 (Reuters Breakingviews) – Taking a company public is nerve-wracking enough without adding geopolitics. Chinese artificial intelligence start-up SenseTime has halted read more its $800 million float in Hong Kong after U.S. officials added it to a blacklist barring Americans from investing. The image recognition expert will probably update its filings and get a smaller deal done, although it won’t come with the international backing it sought . Consider it a small example of what decoupling the U.S. and Chinese economies looks like.

On Friday the U.S. Treasury added SenseTime to a list of “Chinese military-industrial complex companies” because, it said, the company had developed facial recognition software that could determine a subject’s ethnicity. SenseTime, which was due to price its initial public offering that day, responded on Saturday that the decision reflected a fundamental misunderstanding of its business. On Monday, it halted the IPO process to update its filings with details of its blacklisting.

The news came out of the blue, but the direction of travel was already clear. Since October 2019, SenseTime has been on Washington’s so-called “Entity” list which prevents it getting American components; the decision was due to a joint venture it had sold in March that year which operated in China’s controversial Xinjiang region. Fellow Chinese AI expert Megvii, also on the Entity list, in 2020 let a Hong Kong listing application lapse and is currently seeking instead to list in Shanghai.

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For SenseTime the new blacklisting is a blow but not a financial disaster. Its roster of pre-IPO backers featuring international names like U.S. investor Silver Lake and SoftBank’s (9984.T) Saudi-backed Vision Fund had given the company overseas recognition. Including a western bank, HSBC (HSBA.L), (0005.HK) read more , among its lead IPO advisers, also suggested it wanted more international acceptance. Still, SenseTime’s $1.3 billion of cash on hand as of end-June will at least cover its operating cash burn for more than two years at its half-year pace.

A decoupling between the U.S. and Chinese financial systems brought on by rising geopolitical tensions is a hotly debated and still somewhat ill-defined idea. China’s AI sector is one of the first real-time tests.

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CONTEXT NEWS

– Chinese artificial intelligence startup SenseTime Group on Dec. 13 postponed a Hong Kong initial public offering after being placed on a U.S. investment blacklist on Dec. 10.

– The company, which had planned to raise up to $767 million, said it was committed to going ahead with the float and would publish a supplemental prospectus and an updated listing timetable.

– On Dec. 10, the U.S. Treasury added SenseTime to a list of “Chinese military-industrial complex companies” and accused it of developing facial recognition technology that could determine a subject’s ethnicity. U.S. firms are barred from backing firms on the list.

– SenseTime has said the characterisation of its operations reflected a fundamental misunderstanding of its business.

– In 2019, SenseTime was added to a separate blacklist blocking U.S. companies from supplying it with components.

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Editing by Robyn Mak and Thomas Shum

Our Standards: The Thomson Reuters Trust Principles.

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