'Draconian development' in Meta-Manus deal draws the line in China's AI race with the U.S.

BEIJING — China's decision to block U.S. tech giant Meta's $2 billion acquisition of artificial intelligence startup Manus is being seen by analysts as a warning to tech entrepreneurs.

"Clearly after Manusgate, founders will know that if you start in China, you stay in China," said Duncan Clark, an early advisor to Alibaba and chairman of consultancy firm BDA China.

"We know the deal was already in trouble," he said, "but this draconian development is on the more extreme side of the likely outcomes."

The timing is notable as it comes just days before Meta's scheduled earnings release Wednesday local time, and less than a month before a planned visit by U.S. President Donald Trump to Beijing, during which trade and investment are expected to be discussed.

The case also has direct implications for how businesses and investors position themselves in the U.S.-China tech race, as they navigate new risks around data, talent and intellectual property.

For Chinese AI startups and U.S. investors, "the takeaway is that Singapore incorporation alone does not de-risk a deal from Chinese regulatory reach," said Chris Pereira, president and CEO of consulting firm iMpact.

"The broader implication," he said, "is that a new front in the competition between the U.S. and China just opened up: talent itself."

Manus, which has Chinese roots, relocated to Singapore before Meta agreed to acquire it in December.

Many other China-affiliated tech startups, including fast-fashion giant Shein, have attempted similar business structures to reduce their Chinese footprint — dubbed "Singapore washing" — as they navigate rising scrutiny of foreign tech by both Washington and Beijing.

Chinese authorities on Monday demanded that parties involved with the transaction withdraw, just months after launching a probe. It was not immediately clear how the unwinding process would proceed.

Analysts said the decision could serve as a signal to founders about relocating sensitive technology overseas.

"More than the models and AI agents, China is most concerned about whether China-origin strategically sensitive technologies — and the data and talent behind them — are effectively transferred offshore by corporate restructuring in Singapore," said Winston Ma, adjunct professor at NYU School of Law.

"The most complex aspect of this deal unwinding in the digital world is the data reversal," Ma said, noting it's much more challenging than reversing a physical goods transaction.

A Meta spokesperson told CNBC that the transaction "complied fully with applicable law. We anticipate an appropriate resolution to the inquiry." Manus did not immediately respond to a CNBC request for comment.

"The practical reality is China has no leverage over Meta," said Gary Dvorchak, Blueshirt Group managing director. The Facebook parent's social media platforms are blocked in China by an internet firewall.

Compared with its business in the European Union, Meta "makes nothing in China," which means the company could ignore Beijing and proceed with the deal, Dvorchak said. But Beijing could disrupt Manus' operations, making the startup "essentially worthless to Meta if they merge," he added.

Meta disclosed that about 11% of its revenue in 2024 came from China, but did not share those figures in 2025. Europe accounted for more than 20% of Meta's revenue in 2024 and 2025.

While Meta noted in its 2025 annual report that it generates "meaningful revenue from a small number of resellers serving advertisers based in China," it flagged that regulatory action, including U.S.-China tensions, could be a risk to its financial performance.

Beijing's move to block the acquisition appeared to be the first time China used foreign investment security review measures introduced in late 2020.

Reflecting the weight of national security concerns, the rules established a dedicated office under the National Development and Reform Commission, China's economic planning agency.

The measures called on companies to seek approval for deals involving national security concerns before undertaking a foreign investment "directly or indirectly" in mainland China. It is unclear whether Meta or Manus was required to do so and whether they communicated with regulators in advance. Reports indicate Beijing started reviewing the deal after it was announced.

"Manus's early R&D was conducted in China and ... its core data originated there," Chinese state-run tabloid Global Times said in an English-language version of its editorial overnight.

"The key issue is not where the company is registered or where its team is currently based," the editorial said. "Rather, it lies in the extent of its technological, talent and data links with China, "and whether the transaction could harm China's industrial security and development interests."

As OpenAI's ChatGPT took the world by storm in 2022, Washington tightened restrictions on chip exports to China, limiting access to a lucrative market for companies such as U.S. semiconductor giant Nvidia.

China has pushed for tech self-sufficiency but has struggled to catch up. Breakthroughs from firms such as DeepSeek in January 2025 marked a moment of national pride.

The open-sourced AI model did not rely on overseas-trained talent. DeepSeek also slashed AI usage costs — even as the U.S. restricted China's access to high-end chips.

On the heels of this enthusiasm, Manus, on March 5, 2025, released an AI tool that took the tech to the next level, from generating ideas to autonomously completing tasks.

China's state media hailed the launch as "the next DeepSeek." Beijing's municipal government was quick to highlight that Manus was created by a local tech company called Beijing Red Butterfly Technology.

But by July 2025, Manus had restructured as a Singapore-headquartered company. In March, China outlined plans to transform its technology ambitions in its latest five-year development plan.

China wants to "avoid situations where Chinese talent can boost U.S. firms in their AI rivalry," BDA's Clark said, noting that Chinese talent accounts for about half of the global AI engineering pool in biotech and many other sectors.

"They don't want to allow people or companies to bend or skirt the rules. We saw this with Ant Group's aborted IPO, Didi jumping the gun with its U.S. listing then delisting. Now Manus."

"The Manus case could further divide the AI ecosystem between China and [the] U.S., deterring overseas AI talents from returning to China," said Dan Wang, a director on Eurasia Group's China team.