Dollar funding for Chinese startups is drying up
International funding for Chinese startups dried up last year, prompting many early-stage tech companies to raise capital and list at home rather than on Wall Street.
Dollar investments in the country’s new businesses fell by nearly three-quarters last year, falling to 19 percent of total capital invested in startups from 39 percent in 2021, according to new data from research group ITJuzi.
Chinese investors and founders say geopolitical tensions with the US, along with Beijing’s tech crackdown and tough zero-Covid policy, have spooked foreign investors. At the same time, growing support from the Chinese government and sanctions from Washington made the renminbi hike more attractive.
The decision to raise dollars or renminbi generally puts Chinese entrepreneurs down two very different paths. One results in successful companies going public in New York or Hong Kong, while the other usually results in a listing in Shanghai, Shenzhen, or Beijing.
“China’s venture market has been very, very different over the past year,” said Zhou Xiang, head of Mingde Capital Advisors, which helps startups raise finance. “The last half of all trades were based in dollars, now it’s 70 or 80 percent RMB,” he said.
Zhou said the waning interest in dollars, particularly in the country’s hip hard-tech sector, is partly due to founders being nervous about potential US sanctions in the future. Beijing has also pushed for indigenous development.
“Chips, robots, AI, the Chinese government also wants these types of companies to be listed in China, not the US,” Zhou said.
The decline in dollar funding for start-ups comes as major international investors retreat from pouring money into China-focused private equity and venture funds. Chinese funds raised just $14 billion last year, compared to $95 billion in 2021, according to Preqin data.
The latest investors to reconsider their China strategy are Singapore’s sovereign wealth fund GIC and the Ontario Teachers’ Pension Plan, two groups that benefited from China deals during the country’s boom years.
Even if Beijing abandons zero-Covid and eases its tech crackdown, it could be difficult for foreign investors to come back. The White House is working to create a screening process for American capital flowing into China to reduce the flow of money from US investors to Chinese companies or sectors that aid the People’s Liberation Army.
While China’s local governments and state-owned corporations have set up hundreds of so-called government leadership funds to support strategic tech giants, analysts and asset data say these have not been enough to offset the loss of international investors.
Beijing has increased support for its most promising high-tech startups. Many have earned the “little giants” designation, an official seal that accompanies access to preferential treatment such as government investment, cheap credit, tax breaks and help in recruiting talent.
Investors say many of the 8,997 “little giants” at the national level have raised renminbi funds since the program was launched in 2019.
By raising the renminbi, they can avoid creating “variable interest entities,” the complex offshore corporate structures used by Chinese corporations in sensitive sectors to raise dollar funding. That makes it easier to sign deals with local governments and state groups, investors said.
“There’s a shift happening,” said a Beijing-based investor at a subsidiary of a Silicon Valley fund. The investor said his company decided to launch a new RMB fund instead of a dollar fund.
Sam Gao, head of Beijing Soft Robot Tech Company, said being awarded the “little giant” label by China’s Ministry of Industry and Information Technology last May was transformative.
The company, which specializes in making handles that robots can use to hold everything from pens to dumplings, received a Rmb50 million investment from a Beijing county government shortly thereafter.
Gao said the banks would also provide Rmb20mn to “little giants” in the form of soft loans. Officials are also helping them do business, he added, noting that a former deputy governor in Zhejiang province had helped them seal Rmb 10 million in deals to automate vacuum bottle production lines by arranging cheap bank loans for several bottle makers .
“We have received clear support from government agencies at all levels,” Gao said.
Nian Liu contributed coverage from Beijing
https://www.ft.com/content/f9682546-76fb-4b65-9dce-73656aa55491 Dollar funding for Chinese startups is drying up