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Venture capital has been an important spur to China’s emergence as a technological superpower. Not only have VC funds helped foster world class companies such as Alibaba and Tencent, they have also brought expertise, networking opportunities and markets to a host of Chinese “unicorns”, start-ups worth more than $1bn. But now, for a variety of reasons, China’s start-up sector is in the doldrums. Some commentary from within the industry is laden with doom. “The whole industry has just died before our eyes,” one executive told the Financial Times. “The entrepreneurial spirit is dead. It is very sad to see.”
If such sentiment persists, the implications are grim. The economic vision of Xi Jinping, China’s strongman leader, rests heavily on tech ambitions. Beijing’s official “work report” in March this year exhorted the country to build an industrial and scientific system capable of pushing the world towards new technological frontiers.
Unleashing what Xi calls “new quality productive forces” is now China’s top economic priority. So-called future industries, such as biotech, new energy, new materials, advanced equipment, next generation IT, aerospace and others, are central to realising Beijing’s goals. All these require the innovation that in large part derives from a vibrant start-up ecosystem.
To be sure, China has made impressive progress up the technology ladder. As recently as 20 years ago, it was at best a mid-technology power. By 2023, according to ASPI, an Australian think-tank, China led the world in 57 out of 64 advanced technologies, making it a peer competitor to the US.
Such achievements, however, come from the past. The future trajectory of China’s technological advance is much less certain. Fundraising for China investments by both overseas and domestic venture capital funds has fallen off a cliff since 2022, driving a dramatic decline in the number of start-ups founded in China last year and so far this year, according to data providers.
The reasons fall into two broad categories. The first are macroeconomic, such as China’s broader slowdown since the outbreak of the Covid-19 pandemic and the bursting of the property bubble. The second can be laid at the door of Xi himself. Regulatory crackdowns on leading private tech companies, such as Alibaba and Tencent, have hammered their stock market valuations and sown deep uncertainty over Beijing’s ideological attitude towards private enterprise.
In addition, the broad US-China strategic rivalry has helped scare off international venture capital from the Chinese market, partly because investors know that finding an “exit” through listing on international stock markets has become more challenging.
All this is having second-order effects. Chinese students studying abroad see fewer opportunities back in China in the once-magnetic tech sector. There is a sharp rise in litigation, too. Caixin, a Chinese business publication, reported in August that a leading state-owned VC company, Shenzhen Capital Group, filed 35 lawsuits against companies that had largely failed to go public by a set date and had not repurchased shares.
The throttling of China’s start-up ecosystem stands as an indictment of Xi’s economic programme. If China wishes to sustain its tech pre-eminence, it needs wholesale reform.
The underprivileged private sector should be given equal status with state-owned industries. The dwindling of transparency that occludes China’s financial markets must be reversed so investor confidence can be rebuilt. Above all, Xi himself needs to realise that innovation does not follow administrative fiat. Creativity flows when a hundred schools of thought contend.