International funding for Chinese start-ups dried up last year, pushing many fledgling technology companies to raise capital and list at home instead of on Wall Street.
Dollar investments in the country’s new companies fell by nearly three-quarters last year, declining to 19 per cent of the total capital put into start-ups from 39 per cent in 2021, according to new data from research group ITJuzi.
Chinese investors and founders say geopolitical tensions with the US, as well as Beijing’s tech crackdown and harsh zero-Covid policy spooked foreign investors. At the same time, growing support from the Chinese government and Washington’s sanctions also made raising Renminbi more appealing.
The decision to raise dollars or Renminbi generally puts Chinese entrepreneurs on two very different paths. One leads to successful companies going public in New York or in Hong Kong, while the other usually results in a listing in Shanghai, Shenzhen or Beijing.
“China’s venture market was very, very different last year,” said Zhou Xiang, head of Mingde Capital Advisors, which helps start-ups raise funding. “In the past half of all deals were dollar based, now it’s 70 or 80 per cent RMB,” he said.
Zhou said that the diminishing interest in dollars, especially in the country’s hot hard tech sector, was in part because founders were nervous about potentially being subject to US sanctions in the future. Beijing has also been pushing for indigenous development.
“Chips, robots, AI, the Chinese government also wants these kinds of companies to get listed in China, not the US,” said Zhou.
The drop in dollar funding for start-ups comes as large international investors pull back from pouring money into China-focused private equity and venture funds. China funds raised only $14bn last year, down from $95bn in 2021, according to Preqin data.
The latest investors to rethink their China strategy are Singapore’s sovereign wealth fund GIC and the Ontario Teachers’ Pension Plan, two groups which reaped rewards from China deals in the country’s boom years.
Even with Beijing abandoning zero-Covid and easing its tech crackdown, foreign investors might find it difficult to return. The White House is working to create a screening process for American capital flowing into China, in an effort to reduce the flow of money from US investors to Chinese companies or sectors that help the People’s Liberation Army.
While China’s local governments and state-owned groups have established hundreds of so-called government guidance funds to back strategic tech groups, these have not been enough to offset the loss of international investors, according to analysts and investment data.
Beijing has stepped up support of its most promising high tech start-ups. Many have won designation as “little giants”, an official stamp that comes with access to preferential treatment such as state investment, cheap loans, tax breaks and help recruiting talent.
Investors say many of the 8,997 national level “little giants” have raised Renminbi funding since the programme was rolled out in 2019.
By raising Renminbi they can avoid creating “variable interest entities”, the complex offshore corporate structures used by Chinese groups in sensitive sectors to take in dollar funding. That makes it easier to sign contracts with local governments and state-owned groups, investors said.
“There is a shift under way,” said a Beijing-based investor at an affiliate of a Silicon Valley fund. The investor said his firm had decided to raise a new RMB fund instead of a dollar fund.
Sam Gao, head of Beijing Soft Robot Tech Company, said gaining the label of “little giant” last May from China’s Ministry of Industry and Information Technology had been transformative.
The company, which specialises in making grips to help robots hold anything from pens to dumplings, soon afterwards won a Rmb50mn investment from a district government in Beijing.
Gao said banks would also provide “little giants” Rmb20mn in low interest loans. Officials are also helping them win business, he added, noting a former deputy governor in Zhejiang province had helped them seal Rmb10mn in deals automating vacuum flask production lines by arranging cheap bank loans to several flask makers.
“We have enjoyed clear support from government departments at all levels,” said Gao.
Nian Liu contributed reporting from Beijing
