Kai-Fu Lee at a book launch party for "AI Superpowers: China, Silicon Valley and the New World Order" in September, 2018. Sylvain Gaboury | Patrick McMullan | Getty Images

The brewing trade war between the U.S. and China is starting to have a significant impact on the market — U.S. stocks suffered their steepest drop since January on Monday as investors feared the prospect of higher tariffs. But in Silicon Valley, that tension has been playing out for months, to the point where many Chinese investors simply aren't doing deals. One of the most notable departures is Sinovation Ventures, the firm started by former Google China president Kai-Fu Lee, who opened a U.S. investing operation in 2013. The head of Sinovation's Silicon Valley office, Chris Evdemon, departed in recent months and informed at least some portfolio companies that the firm was halting investments in the U.S. as it restructured its fund, according to people familiar with the matter who asked not to be named because the conversations were confidential. As part of President Donald Trump's trade dispute with China, the Treasury Department, through the Committee on Foreign Investment in the U.S. (CFIUS), is scrutinizing more Chinese investments and increasingly scuttling deals. Last year, the Trump Administration expanded the scope of CFIUS to include review of non-controlling stakes and investments in addition to outright takeovers. The effects are being felt in tech start-ups. Ad-tech company AppLovin was set to be acquired in 2017 for $1.4 billion by a Chinese private equity firm until CFIUS stepped in, and CNBC reported in April that a health-tech company called PatientsLikeMe was being forced to find a buyer after the U.S. government ordered its majority owner from China to divest.

Benjamin Heywood, co-founder and president of PatientsLikeMe, speaks at a town hall session on healthcare during the National Summit in Detroit, June 15, 2009. Andrew Harrer | Bloomberg | Getty Images

Chinese investments in U.S. start-ups have been on the decline since peaking in 2016. Foreign direct investment from China dropped to $4.8 billion last year from $27 billion in 2017 and $46 billion the prior year, according to Rhodium Group. Perhaps the biggest problem for Chinese firms is that they can't get into the hottest start-ups because those companies have access to plenty of capital without dealing with the potential hassle that comes with cash from China. "Even if the CFIUS restrictions are not directly blocking these deals, the environment has changed enough that it's forcing VCs, specifically Chinese VCs, to retreat themselves," said Matt Sheehan, non-resident fellow at MacroPolo, the think tank of the Paulson Institute. Sheehan, who studies the ties between China and California, said U.S. start-ups taking Chinese money "see it as just adding risk at this point." Sinovation has a particular focus on AI, one of the areas that concerns CFIUS the most because of its potential application to the military.

On the firm's website, Evdemon is still listed as "CEO of Sinovation North America," but multiple people told CNBC that he indicated he left for personal reasons. Evdemon's LinkedIn profile says that he's also currently a venture partner at Basis Set Ventures, founded by former Dropbox executive Lan Xuezhao. The Basis Set website says Evdemon "was the CEO of Sinovation North America for 9 years." Evdemon joined Sinovation in Beijing in 2009, and was one of the six partners named in the latest fund, a $500 million pool of capital raised in April 2018. The others, including Lee, are all based in China. Angela Bao, who had been Sinovation's other main U.S investor, left in mid-2018 to run the Silicon Valley division of a Chinese education company. After publication of this story, a Sinovation spokesperson disputed the idea that changes within the firm were related to trade issues, and sent the following statement: "Sinovation Ventures disagrees with the trade related speculations in this article. Personnel departures mentioned were based on personal reasons. Sinovation continues to invest in the U.S. directly from our Beijing headquarters." Evdemon forwarded a request for comment to a company representative in Beijing.

'Silicon Valley looks downright sluggish'

Sinovation's retreat is certainly not all about politics. Since 2009, when Lee left Google to found the firm, Sinovation has invested the vast majority of its capital in China, where the firm has offices in four cities. Lee, who previously led Microsoft Research, wrote extensively about his bullishness on China in his 2018 book, "AI Superpowers: China, Silicon Valley and the New World Order." He argues in the book that tech entrepreneurs in China have surpassed their U.S. counterparts, particularly in the area of artificial intelligence. "I've spent decades deeply embedded in both Silicon Valley and China's tech scene, working at Apple, Microsoft and Google before incubating and investing in dozens of Chinese startups," wrote Lee, whose firm manages about $2 billion and counts Taiwanese electronics supplier Foxconn as a top limited partner. "I can tell you that Silicon Valley looks downright sluggish compared to its competitors across the Pacific."