As political headwinds intensify, US investment in China’s IT industry declines.

Almost everything between the two giants has been impacted by the tense relations between the U.S. and China, and the venture capital and tech startup ecosystem is no exception.

Recently, it was claimed that President Joe Biden will issue an executive order restricting U.S. investors’ access to China’s semiconductor, artificial intelligence, and quantum computing markets.

The U.S. has previously tightened restrictions on the transfer of important American technology to the nation. However, it seems that American tech investors have already stopped supporting The Red Dragon even before any agreement is inked.

According to Crunchbase statistics, this year is on track to see the least amount of dealmaking by American investors in China in recent years. In China, there were well over 300 investment agreements in 2019 and 2020, but in 2021, when the venture capital industry was booming, that figure increased to 426. However, that number dropped to just 283 agreements in 2017 as political headwinds got greater. Additionally, as of April of this year, less than 150 agreements involving digital firms in China were expected to include investors headquartered in the United States.

Investors do not anticipate a quick increase in those figures.

Adapting to climate
Unnamed investor said that a number of factors, including political tension, government action against certain Chinese tech businesses, and concerns about the capacity of some startups with Chinese roots to list on the biggest exchanges in the U.S., caused his company to stop investing in China.

Additionally, LPs expressed some worries about the environmental, social, and governance sectors, he said.

“There is uncertainty to begin with with investing in this business, and this just added another level of uncertainty,” he said.

According to Crunchbase, the major U.S.-based investors in China have dramatically reduced their investment pace in the area in recent years.

According to Crunchbase statistics, Menlo Park, California-based GGV Capital has completed the most acquisitions in China since 2019 with 133, but just two so far in this year, after a dozen in 2022.
BlueRun Ventures, previously Nokia VC, a different Menlo Park company, has made 71 investments since 2019, but just 19 last year and none so far this year.
GL Ventures, a San Francisco-based company that specializes in online gaming and sports technology, has only done 11 acquisitions in China since 2020.
Similarly, GSR Ventures, located in Palo Alto, California, which invests in early-stage digital startups creating AI-enabled technologies, has closed 60 agreements in China since 2019, but just 13 in the previous 16 months.
In the preceding four or more years, SOSV and OrbiMed each disclosed more than 40 transactions, but they only announced one contract this year.
Since Sequoia Capital China is a different legal organization from Silicon Valley’s Sequoia Capital and is situated in China, it is not included in the statistics. However, Sequoia has a profit-sharing agreement that enables its U.S. partners to profit from its China-based counterpart’s investments, as The Information revealed earlier this month.

With more than 400 investments in Chinese IT startups since 2019 and 19 so far this year, Sequoia Capital China is a significant investor in the market.

Reduced funding
Even with such significant sums from Sequoia Capital China and other Chinese investors, financing in the country seems to have been impacted by U.S.-based businesses leaving the most populous nation in the world.

Despite ongoing COVID issues in the nation, venture financing in China than quadrupled in 2021, reaching a record high of more than $87 billion, according to Crunchbase.

But in the previous year, their figures decreased by over 47%, to $46.3 billion.

Venture fell to $8.1 billion in the first quarter of this year, its lowest sum in years and virtually a 38% decline both year over year and quarter over quarter.

No forecasting
Even for those who are well knowledgeable about the market, it is impossible to predict whether or not that sharp decline will continue.

Since China joined the World Trade Organization in 2001, according to Hurst Lin, general partner at DCM Ventures and head of the company’s China office since 2006, American investors have been eyeing the enormous prospects in the area.

Political tensions haven’t helped the issue, though, as investor impressions of the area deteriorated around the time of COVID.

“I think there was a cooling-down period as the media’s (reporting) of China changed,” he added. “As a result, foreign capital dwindled. You should be worried about this as an investor since LPs have begun to alter their viewpoint.

Lin recognized that although restrictions on Internet businesses in China and the challenges of listing on international markets probably have an impact on investor sentiment, such problems have always existed.

SinaNet, which was ultimately the first Chinese internet business to successfully list on the Nasdaq, was co-founded by Lin. The listing was carried out via a variable interest company, which is still possible even though they are now subject to government regulation.

The Hong Kong Exchanges have attempted to close the gap caused by the restricted access to overseas exchanges, according to Lin. Alibaba Group, a major player in the technology industry, recently said that its preparations for two other business units, Cainiao Network Technology and Freshippo, to go public in Hong Kong were already progressing.

The Hong Kong exchange, however, has shortcomings. According to Lin, it is better renowned for small-scale investors and industries like manufacturing and real estate. Additionally, there isn’t the research analyst coverage that tech businesses need to enlighten prospective investors, which is a big problem for startups looking to go public.

Will this change course? Lin enquired, “I really don’t know.”

Although U.S. investment in the Chinese market is not at an all-time low, Lin noted, it is at a low point for the active investing cycle that has taken place over the previous several years.

He said, “We’ll see how this works out.