What Is Happening To China’s VC Industry Amid US Sanctions And COVID-19?

There is no deficiency of news regarding the China-US dispute over trade. Despite the severe outbreak of COVID-19 worldwide, the United States government seems to be unmoved on trade tariffs imposed upon China. Beijing, too, is implementing tight controls over its currency to prevent money outflow, which was prevalent in the previous half-decade. Certain domestic developments also have a role to play in influencing cross-border trade. So, continued speculation has caused investors both in China and the USA to undergo a profoundly complex economic and political matrix. 

China’s Venture Capital Ecosystem

For the past 20 years, China has emerged as the epicenter of numerous startups with more than 1 billion US dollar valuations. Out of these, a significant fraction could not make their mark despite getting outstanding funds. Still, we see that China has more unicorn companies in comparison to the United States. The US has 203 unicorns while China has 206. China and the USA together form a whopping 80% of the globe’s total unicorn startup companies. 

Many United States-based venture capital companies have opened up their branches in China. Interestingly, many of these China branches of the US’s venture companies have effectively decoupled themselves from the American parent organizations. It is because China offers way more lucrative chances to grow. We are witnessing that these China-based venture capital companies from the US find independence just like native Chinese counterparts such as Shenzhen Capital Group and Sequoia. 

Deal Making In China Undergoing A Comeback

Venture capital deals are currently undergoing a comeback after the terrible slow down caused by the COVID-19 pandemic. In March alone, Chinese companies have sealed 66 VC deals which is just a little less than what happened in the previous year at the same time. Indeed, it seems that the venture capital industry could easily mount a comeback not only in China but across the world. 

There is another side of the financial data as well. According to the Organization of Economic Cooperation and Development—the total stock of foreign direct investment is multiple times greater in the United States as compared to China. 

Everything right from restrictions on traveling and other lockdown measures had made things worse. In the opening one and a half months, the volume of deals and the total capital gathered had come down by more than half in the same period in the previous year. 

However, it would be good if optimism is taken with a pinch of salt. And we must exercise caution. Everyone should be vigilant of what will happen if another wave of pandemic hits China. Maybe tougher lockdown regulations would be placed, and deal-making would plunge. 

China Beats United States in Managing and Controlling COVID-19

China successfully managed coronavirus and controlled it within its national borders irrespective of the fact that it was the first country to be hurt by this life-threatening disease. 

The reason behind such a robust response in the face of a deadly pandemic were severe lockdown regulations, abundant supply of personal protective equipment, and COVID-19 detection testing en masse. That is why we see that China has such a low death count despite it being densely populated and the most populated nation on the earth. 

According to the John Hopkins University’s research, China had less than 100,000 COVID-19 cases and has suffered less than 5000 deaths. On the other hand, we see that the United States has a much lesser population but suffered from more than 25 million cases and 400,000 deaths. It is pretty clear that business activities in China are destined to rebound faster than in the USA.  

Venture Capital Industry In China In The Coming 10 Years

At the beginning of the previous year, the startups based in the Asia-Pacific region but headquartered in China were able to raise more funds than their mainland parent companies. It is because that the technology sector in China’s mainland was somewhat saturated, and there was immense unused potential in the Southeast Asia markets and India. It made venture capital companies divert their interest and utilize their big money to be spent on these markets. It is interesting to see that China-based venture capital investment companies made eight times investment standing at more than 1.75 billion US dollars in the first half of the year. More than 15 out of 30 unicorns based out in India had some amount of Chinese venture fund. 

Global Investor Costa Rican venture capitalist Dale W Wood says, “There is a general perception among venture capital companies in China that their home innovation has saturated. Hence, they are looking for the next big things outside the territory.” 

From ‘Factory Of The World’ To A Service Economy

China seems to be fast spinning on the path of becoming a service-driven economy from being the factory of the world. The government is taking significant initiatives and national level strategies such as Internet Plus, Made in China 2025—aim to couple production with high technology such as Internet Of Things, Big Data, Mobile Data, etc. 

China aims to bring an overall digital transformation of its conventional manufacturing sector by using industrial-scale internet. It means it seeks to vigorously utilize new-age technologies such as cloud and 5G even in non-technical companies for better performance, productivity, and efficiency. 

In the last one-decade Chinese companies have made significant profits from the consumer internet industry. In the coming time, consumer internet would undoubtedly grow. But, the opportunities for investments would thrive in areas where efficiency makes the difference. 

Also, Chinese incubators have an opportunity in the coming two decades as US sanctions have hit it. One is in local manufacturing of those high-tech technologies that were earlier imported, and the other is industrial-scale internet that will surely improve its efficiency of scale. 

Will China Sustain In An Uncertain Venture Capital World?

The venture capital sentiment in China would depend upon a host of economic and political reasons happening worldwide. It will primarily depend upon the trade tension between the United States and China. United States dollar funds have become very restrained in the previous few years. It is because United States Committee on Foreign Investments is tightly controlling it. It has made venture capitalists very reluctant to invest in high-tech startups in China, which might prove politically problematic in the times to come. 

Domestic yuan funds, which form three-fourths of the overall venture capital investment in the Chinese territory, have also become cautious because of this reason. There is a very harsh attitude being played by the United States’ regulations for the Chinese tech companies. Investors are anxious that these high-tech startups might not land on the United States’ stock exchanges. 

We are witnessing that the political and business environment has become very unpredictable. Previously, we saw that supplies, talents, and resources were very portable in the world market. However, due to political tensions between the United States and China, globalization has hit a wall; hence, restructuring the supply chain and asset chain is necessary. And, this is not only a Chinese problem but the problem of the world.