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Goldman Sachs rethinks role in China's Megvii IPO after US blacklist

Observers note lack of checks done on the blacklisted firms and say quiet exits by investors are likely

New York/Hong Kong

GOLDMAN Sachs Group Inc said on Tuesday that it was reviewing its involvement in Megvii Technology's planned initial public offering (IPO) after the US government placed the Chinese artificial intelligence (AI) firm on a human-rights blacklist.

The Trump administration said on Monday that Megvii and seven other Chinese companies were targeted because they were implicated in Beijing's repression of Muslim minority populations in the Xinjiang Uighur Autonomous Region in the far west of the country.

In an e-mailed statement in response to a request for comment on the Alibaba-backed Megvii IPO, Goldman said it was "evaluating in light of the recent developments".

Sources had previously told Reuters that the listing was scheduled for Hong Kong in the fourth quarter and might raise as much as US$1 billion.

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Other US companies involved with the blacklisted Chinese firms, whether as investors or as underwriters, are also likely to re-evaluate their relationships, risk consultants and Silicon Valley lawyers said.

Goldman is a joint sponsor of the Megvii IPO, alongside Citigroup Inc and JPMorgan Chase & Co, which both declined to comment.

Goldman had thoroughly evaluated the Megvii deal before initially signing onto it using its usual due diligence process, a person close to the matter said.

Known for its facial-recognition platform Face++, Megvii will become the first Chinese AI firm to go public if the deal goes ahead.

The company provides facial recognition and other AI technology to governments and companies such as Alibaba, Ant Financial, the Lenovo Group and Huawei.

The US Department of Commerce on Monday barred eight companies and 20 Chinese government entities from buying American technology without Washington DC's approval. This would include high-powered computer chips made by the US.

The products of companies such as Nvidia, Intel and Qualcomm are considered critical for building and operating many AI systems.

The government said the entities were "implicated in human rights violations and abuses in the implementation of China's campaign of repression, mass arbitrary detention and high-technology surveillance against Uighurs, Kazakhs and other members of Muslim minority groups".

Megvii said it "strongly objects" to being added to the blacklist and there were "no grounds" for the designation. In a statement, it said around 1 per cent of revenues were derived from Xinjiang in 2018 and none in the six months ended June 30.

It added that a May 2019 report from Human Rights Watch (HRW) on a surveillance app in Xinjiang had implicated Megvii's Face++, but in a corrected and reissued report, HRW did not highlight Megvii's name.

On Tuesday, the US government imposed visa restrictions on Chinese government and Communist Party officials it believes responsible for the detention or abuse of Muslims in Xinjiang.

United Nations' experts and activists say at least a million Uighurs and members of other largely Muslim minority groups, have been detained in camps in the remote region.

Beijing denies ill treatment at the camps, which it says provide vocational training to stamp out religious extremism and teach new work skills.

US Senator Marco Rubio, who has been seeking to spotlight both the easy access that Chinese companies have been given to US markets and the human rights abuses in Xinjiang, said the government's move had been long overdue.

"We should continue to do more to hold the Chinese government and Communist Party officials accountable for potential crimes against humanity being committed in Xinjiang," he said in a statement.

In recent years, Chinese and some foreign investors have poured money into startups that specialise in facial- and voice-recognition software, as well as other surveillance equipment and software. They have been buoyed by China's plans to build a ubiquitous CCTV surveillance network.

Another company on the US government's blacklist, SenseTime, is among the world's most highly valued AI firms and counts marquee US technology investors Tiger Global and Silver Lake Partners among its backers.

Fidelity, the American mutual fund firm, is also a SenseTime investor, along with Qualcomm.

Bloomberg reported that the Massachusetts Institute of Technology (MIT) said it will review its relationship with SenseTime, the first company to join the American university's research effort into human and machine intelligence.

MIT would review all its existing relationships with organisations on the blacklist, Bloomberg quoted a spokesman as having said in an e-mail.

Risk consultants say that investors and underwriters have jumped into the sector without fully assessing the dangers both to their reputations and to the valuations of the companies concerned.

Roger Robinson, president and chief executive of the Washington DC-based risk consultancy RWR Advisory Group and also a former senior director of international economic affairs at the National Security Council, said: "There has been a dearth of adequate due diligence performed on these companies from both a national security and a human-rights perspective."

He said investors and others involved with these Chinese companies "may well be putting themselves at risk". Silver Lake, Tiger Global and Qualcomm all declined to comment. Fidelity didn't immediately return a call seeking a comment.

Rocky Lee, managing partner of the Silicon Valley office of law firm King & Wood Mallesons, said: "There will be a judgment call as to whether any US investor would want to be associated with such businesses.

"I believe you will see some quiet exiting by US funds and possibly LPs, at least those US investors who feel strongly that owning companies engaging in these activities are either immoral or politically incorrect." REUTERS

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