Increasing wariness in Washington over China’s investments in U.S. biotechnology companies may cool a hot source of capital for medical startups.

Chinese investors have been a mainstay of recent fundraising by private biotechnology firms. At least one Chinese investor has participated in 41 U.S. biotech financing deals valued at a total of $2.6bn this year, according to Pitchbook. Beijing wants to kickstart its domestic drug industry as it emphasizes high-tech fields over the manufacturing and construction that made China a global economic behemoth.

That campaign has caused tension with the Trump administration, which has signaled that it will be taking a closer look at Chinese funding of U.S.-based drug companies, medical-device makers and other health-care enterprises. It’s unclear whether the trade truce reached by President Donald Trump and Chinese President Xi Jinping over the weekend will change that.

New U.S. regulations have put biotech on the same level in terms of importance to national security as aerospace and microchips.

Last month, a division of the U.S. Commerce Department sought public comment on a proposal to give it more oversight of advanced technology exports — such as genetic engineering — that it deems vital to national security. Earlier this year, the Committee on Foreign Investment in the U.S., an interagency panel known as CFIUS, got new powers to scrutinize minority investments by foreign entities in biotech and other sectors.

U.S. Trade Representative Robert Lighthizer is also focused on Chinese venture-capital investments in American firms. In a Nov. 20 report, his office noted that investment in biotechnology “accounts for much of the increase in Chinese VC activity in the United States in recent years.”

Lighthizer’s office didn’t respond to emailed requests for comment. A representative for the Commerce Department said the rulemaking is ongoing and that the agency will review public comments before final decisions are made.

Investors Adapt

Companies and investors are adapting to the change in tone. Joel Marcus, the chairman of Alexandria Real Estate Equities Inc., a prolific biotechnology investor, said a private company in which he was involved rejected an investor from mainland China in a recent funding round after the company’s lawyers advised that it might invite unwanted scrutiny.

Marcus said it was the first time he had heard of a Chinese investor being rejected for such a reason. Marcus declined to name the company.

Other companies have been monitoring developments and checking in with lawyers. Goodwin Proctor lawyer Richard Matheny, who is based in Washington, said he’s given guidance to about 100 life-sciences clients on how the proposed changes could affect them.

“We’ve seen heightened degree of concern, confusion, and uncertainty, including from life sciences clients that are unlikely to be affected by these rules,” Matheny said. Some clients have asked “what even is CFIUS, because these are clients that have not been impacted before.”

Not everyone is concerned. An executive responsible for global dealmaking on behalf of a Chinese pharmaceutical company, including in the U.S., said the firm wasn’t worried that the changes would affect their plans because the areas of medicine the company is interested in are more conventional than those singled out by the Commerce Department. The person, based in the U.S., spoke on the condition of anonymity because of the sensitive nature of the topic.

Asia Confusion

The proposals have caused confusion in Asia, said Frank Yu, founder and chief executive officer of Hong Kong-based Ally Bridge Group. Yu said he’s received calls from investors in mainland China, Hong Kong, and Taiwan seeking advice on the new regulations. He also said that there has been confusion among U.S. businesses in the process of raising capital. Yu said he’s had in-depth discussions with U.S. lawyers and is confident his firm is prepared for any changes.

Ally Bridge is an investor in Grail Inc., a private San Francisco-area company working on early cancer detection that’s valued at about $3.2bn, according to Pitchbook. Chinese firms including Hillhouse Capital Group; HuangPu River Capital; and ICBC International, the Hong Kong subsidiary of state-owned bank Industrial and Commercial Bank of China Ltd., took part in its $300m funding round in May.

“There are significant uncertainties and unknowns with the evolving CFIUS rules,” said Grail spokeswoman Charlotte Arnold in an email. “As a health-care company with international investors, we are actively monitoring developments and any potential impact the new rules may have on our business.”

Protecting innovative industries has become an important goal of the Trump administration as it navigates the roiling waters of global trade. A White House official in late October indicated that the administration sees biotech as an area worth protecting.

It is not “cliche to talk about the fact that China wants to take this industry away,” said Joe Grogan, associate director of health programs at the White House’s Office of Management and Budget, during an Oct. 24 speech at the Petrie-Flom Center at Harvard Law School about drug prices. “At one point, Germany was the world’s clear No. 1 player in biopharmaceutical science.”

“Through a series of disastrous policy mistakes, it has rendered itself virtually an also-ran,” Grogan continued. “We could go the same way.”