SAN FRANCISCO (Reuters) – Chinese investors maneuvered around heightened geopolitical tensions to make record-level investments into U.S. startups in 2018, but increasingly hostile conditions will likely lead to a dropoff in Chinese funding for this year, according to a new report.

Chinese entities invested $3.6 billion last year in U.S. companies, exceeding the previous record of $2.8 billion in 2015, although the number of deals dipped to about 270 from more than 300, according to the report from New York-based economic research firm Rhodium Group.

The robust investment comes despite policy headwinds from U.S. President Donald Trump’s administration, which has levied tariffs on $250 billion of Chinese goods and penalized telecoms companies Huawei and ZTE, which the United States accuses of spying. The report’s findings show the amplified role China has taken in the U.S. startup industry, even as it confronts a new U.S. law to limit access to bleeding edge technology.

The law “could yet have a chilling effect on future investment,” the report cautioned.

The new law, known as FIRRMA, expanded the powers of an obscure government group called the Committee on Foreign Investment in the United States (CFIUS) to probe transactions previously excluded from its purview, including attempts by foreigners to purchase minority stakes in U.S. startups.

CFIUS began applying the law in November through a pilot program, and its effect would not be fully captured by the Rhodium report, which covers all of 2018. The government set a deadline to fully implement FIRRMA and clear up a number of ambiguities early next year.

“I think the immense uncertainty about what the rules mean, the interpretation, how they are going to enforce it, what enforcement looks like, all of that produces a situation where it wouldn’t be surprising if the effect so far seems modest,” said Stephen Heifetz, a former member of CFIUS and now a lawyer advising companies undergoing CFIUS review.

Chinese investors, including big family offices, have walked away from transactions and stopped taking meetings with U.S. startups, Reuters has reported. The opacity of venture capital, a business with few required disclosures and layers of funds to conceal the source of money, makes it difficult to quantify the precise level of Chinese investment.

Rhodium estimates that Chinese entities have poured about $14 billion into U.S. startups since 2000, with 80 percent of the deals occurring since 2014.

But the report cautions “tremendous uncertainty” for Chinese investment this year and points to “notable shifts within investor mix and targeted industries and technologies since FIRRMA’s passage.”

Investments from Chinese state-owned investors had all but disappeared by February of this year, according to Rhodium. In mid-2018, there were about five such deals each month. These investors, which are controlled by the Chinese government, would likely find it impossible to get approval for an investment in a U.S. company building sensitive technology, attorneys say.

Also, Chinese venture capitalists have tried to steer clear of the technology CFIUS is closely probing, such as artificial intelligence, data analytics and cyber security. Roughly 40 percent of the Chinese VC deals last year went to biotechnology and pharmaceutical companies, the report says.

However, that area could soon prove challenging for Chinese financiers, as CFIUS is ramping up its scrutiny of foreign biotech investments, said James Lewis, a defense and technology expert at the Center for Strategic and International Studies.

The economic slowdown in China adds further complications, causing some Chinese venture firms to fold and other investors to pull back on their overseas spending.

“There is tremendous uncertainty for the remainder of 2019,” the report says.

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