TikTok drama underscores growing U.S.-China divide

TikTok, the popular social media app that’s taken the world by storm, is increasingly living a double life in the U.S.

• The platform faces growing bans and open disdain from lawmakers, while also representing potentially huge financial returns for its American investors.

Why it matters: After decades of a united pro-China stance, the U.S. political and business consensus is fracturing in ways that are creating blowback for investors and companies.

State of play: TikTok is currently banned by about half of U.S. states and Congress from government devices, and is facing calls in Washington for a total ban over privacy concerns.

• The company is currently working to finalize its deal that's had Oracle host its U.S.-based users' data, in an attempt to wall it off from Chinese government access.
• The deal was first proposed in 2020 during the Trump administration, in response to national security concerns.

Yes, but: TikTok is but one symptom of this broader trend that's shaking up the status quo in Chinese investment.

• The Committee for Foreign Investments in the United States (CFIUS) turned up its scrutiny of Chinese investors’ activities during the early days of the Trump administration.
• Now, there’s even talk of the Biden administration looking to do the same with American investors’ dealings in China, and Sino-American relations are growing more tense.
• And just this week, U.S. Sens. Mitt Romney (R-Utah) and Chris Van Hollen (D-Md.) renewed efforts to end China's status as a developing nation in future treaties and international organizations.

Meanwhile: American venture capital investors have been pouring more and more dollars into China's stable of startups — such as ByteDance, TikTok's owner.

By the numbers: In 2022, Chinese startups raised more than $9 billion in venture capital including from U.S. investors, according to data from PitchBook and Crunchbase.

• 2021: $27.5 billion-$32.2 billion
• 2020: $19.8 billion-$25.5 billion
• 2019: $14.9 billion-$29.9 billion
• 2018: $43.9 billion-$46.9 billion

And: It's not just VCs — their investors, or limited partners, have also been backing China-focused and China-based venture funds.

• Still, some VCs have been vocally anti-China for some time.

Between the lines: American lawmakers may be critical of Beijing's policies, but China still represents a huge market opportunity that's nearly impossible for U.S. companies to ignore.

• Just look at Apple's continued careful treading around concerns over human rights violations, and its relationship with Hong Kong and Taiwan. Apple's iPhones had a market share of between 20% and 25% in the last six months.

The intrigue: Wall Street investors have been pulling out of the Chinese market in the last year, amid growing challenges to China's economic growth.

• For the first time in a decade, foreign investors became net sellers of Chinese fixed income and equities last year, per Goldman Sachs.

The bottom line: This awkward tension is unlikely to disappear anytime soon.