China market loses its shine for private equity investors as nation’s economy slows, zero-Covid-19 policy remains in force
- Venture capitalists are biding their time on new investments in China amid increased uncertainty in the market
- Investors see challenges posed by Beijing’s strict zero-Covid-19 policy, tensions in US-China relations and Russia’s war with Ukraine
These have all put a strain on economic activity, which has resulted in venture capitalists biding their time on investments in the country, according to interviews with several private equity investors and market analysts.
“There have been many [government] policy adjustments since the second half of last year, so it is very common that investors – especially overseas investors – are worried about the uncertainty [brought by these changes],” Zhou said.
The “combination of more transmissible [coronavirus] variants and the strict zero-Covid policy could continue to hamper economic activity and increase uncertainty”, the IMF said in its latest World Economic Outlook.
The stakes have never been higher for both venture capitalists and Chinese firms, as they try to navigate an uncertain regulatory environment, ongoing geopolitical tensions and slower economic growth.
China’s internet sector sees steep drop in funding amid rising risks
China’s internet companies, which raised funding of more than US$15 billion in the first quarter of 2021, obtained only US$3.5 billion in the same period this year, according to a report published last month by the China Academy of Information and Communications Technology. In the first quarter this year, the number of fundraising deals in the country’s internet sector fell 38.3 per cent from a year ago, while fundraising volume plunged 76.7 per cent.
The sharp decline came at a time when the country faced its worst Covid-19 outbreak since the pandemic began about two year ago. China is currently one of the few countries to pursue a stringent zero-Covid-19 policy, while many countries around the world have adapted to living with the virus.
But the day when China eases border restrictions could provide more clarity for investors. “If the border opens up, it would definitely be very helpful for venture capital and cross-border [mergers and acquisitions],” said Jeff Wu, China partner at Silicon Valley-based venture capital firm Pegasus Tech Ventures.
Xi says China’s Covid policies will ‘stand the test of time in Shanghai’
While many venture capitalists carefully study various factors before pulling the trigger on new investments in China, optimism remains the path for others.
“Covid-19 is a very strong factor, but it’s not the dominant factor that defines what you invest in,” said a Shanghai-based venture capitalist surnamed Yu, who declined to provide her full name and title. “The Chinese market still has great potential over the long term.”
Yu asserted that not all companies need to go global. “For certain industries, the China market is already enough to build a listed company,” she said.
China still managed to raise US$12.7 billion in venture funding in the first quarter this year, according to a CB insights report in April. That amount was behind the US$71.2 billion raised by the US in the same period, but ahead of the UK’s US$9.2 billion haul, the report said. Global venture funding totalled US$143.9 billion across 8,835 deals in the first quarter.
‘Pandemic has to be contained, economy should be stabilised’, says Beijing
Sheth indicated that the zero-Covid-19 policy, for US investors, “seems impractical and set up for failure”.
“Covid-19 is [now considered] just like a mild flu in the US, Europe and most of the world,” Sheth said. “We need to see a more liberal Covid-19 containment policy, financial stimulus, lower interest rates, and ‘stop’ the tech crackdown to see sentiment recover [for the China tech sector].”
New China policies to support Big Tech innovation, state newspaper says
Whether investors have money to put in the primary market is very much affected by the performance in the secondary market, according to Sophie Yao, managing director at Pegasus Tech Ventures China. “The whole stock market is at a low level, which means investors are losing confidence,” Yao said.
Retail investor Sheth, however, indicated that investing in China is currently in “a glass half-full” state. He said the government’s recent push to address uncertainty in the market “may be too little, too late”.