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The Manus Fallout Highlights Structural Problems in China’s Industrial Policy Ecosystem

China wants to welcome foreign investment, but its red lines are shifting. That’s not an attractive proposition for many companies.

Within a couple of years of its incubation in 2023, Manus, an autonomous agentic AI start-up, made headlines in December 2025, when Meta announced its acquisition for $2 billion. Although the Chinese authorities rushed to order a probe into the deal, it took four months to finally unwind the transaction. Since the 2020 regulatory crackdown on technology enterprises, Beijing has been closely monitoring and directing the growth of tech startups. Despite that, China had to retroactively unwind the deal after the transaction had been consummated. The belated quashing of the Manus acquisition will create challenges in effectively disentangling the transfer of data, assets, and talent. More than that, the episode also represents significant structural tensions in China’s domestic industrial policy ecosystem.

First, the regulatory intervention in Manus’ case was unconventional. It was undertaken by China’s top economic planning body, the National Development Reforms Commission (NDRC), and not the anti-monopoly regulatory authority, the State Administration for Market Regulation, which had taken similar actions in the past. Notably, the NDRC’s intervention invoked the 2021 Foreign Investment Security Review Measures for the first time, which could be called a step toward institutional improvisation, rather than merely a regulatory intervention. 

According to reports, the matter had been escalated to China’s National Security Commission. That not only indicates that China viewed the risk of Manus slipping into Meta’s hands as a national security problem, but it also holds enormous implications for existing regulatory clarity for AI companies. Chinese regulators appear to have drawn a red line at the popular practice of companies founded in China restructuring and operating from an offshore location (called “Singapore washing”). Chinese AI companies will look at the Manus fallout as a cautionary tale. But the unprecedented nature of the intervention means that Chinese AI startups cannot model regulatory risks with any precision. 

The fallout is already visible in recent steps taken by leading Chinese startups. MiroMind is expected to suspend its services in Greater China due to ongoing business adjustments. The CEO stated that strict internal firewalls were needed between the company’s domestic and international operations. Moonshot AI is considering unwinding its special corporate structure, as Beijing has instructed it to pursue a listing in Hong Kong through a mainland Chinese entity, instead of the Cayman Islands. 

Such a visible panic among Chinese AI startups has led the NDRC to issue an appeal that foreign investments do not need to be curtailed. In fact, days after the decision to block this acquisition, Chinese officials reaffirmed their open-door policies toward foreign investment. At the same time, reports suggest that the domestic funding in Chinese AI start-ups tripled in the first quarter of 2026. 

China watchers often remain puzzled about the gap between its official stance on innovation and its regulatory policies. Research demonstrates that the Chinese state’s policies toward its technology........

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