Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.
Venture capital has been a major stimulus to China’s emergence as a tech superpower. Venture capital funds have not only helped propel world-class companies like Alibaba and Tencent, but have also brought expertise, networking opportunities and markets to a number of Chinese “unicorns” — startups worth more than $1 billion. But now, for a variety of reasons, China’s startup sector is stagnating. Some commentary from within the industry is fraught with pessimism. “The whole industry has just died before our eyes,” said one executive. He told the Financial Times“The entrepreneurial spirit is dead. It’s very sad to see it.”
If that sentiment persists, the consequences will be dire. The economic vision of Xi Jinping, China’s authoritarian leader, relies heavily on technological ambitions. Beijing’s official “work report” in March this year called on the country to build an industrial and scientific system capable of propelling the world toward new technological frontiers.
China’s top economic priority now is to unleash what Xi calls “quality new productive forces.” So-called future industries such as biotechnology, new energy, new materials, advanced equipment, cutting-edge information technology, aerospace and others are critical to realizing Beijing’s goals. All of them require innovation, much of which comes from a vibrant startup ecosystem.
China has certainly made impressive strides on the technological ladder. Just 20 years ago, it was at best a mid-tech power. By 2023, according to ASPI, an Australian think tank, China was a world leader in 57 out of 64 advanced technologies, making it a peer competitor to the United States.
However, these achievements are a thing of the past. The future trajectory of China’s technological advancement is far less certain. Fundraising for investment in China by domestic and foreign venture capital funds has plummeted since 2022, leading to a sharp decline in the number of startups 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 the broader slowdown Since the outbreak of the Covid-19 pandemic and the bursting of the property bubble, the latter can be blamed on Xi himself. Regulatory crackdowns on major private tech companies such as Alibaba and Tencent have hit their stock valuations hard and sown deep uncertainty about Beijing’s ideological attitude towards China. private enterprise.
Moreover, the broader strategic rivalry between the United States and China has helped scare away international venture capital from the Chinese market, in part because investors know that finding an “exit” through listing on international stock markets has become more difficult.
All of this is having second-order effects. Chinese students studying abroad are seeing fewer opportunities in China in the once-attractive technology sector. There has also been a marked rise in litigation. Caixin, a Chinese business publication, reported in August that a major state-owned venture capital firm, Shenzhen Capital Group, filed 35 lawsuits against companies that had largely failed to go public by a certain date and had failed to buy back shares.
The limited startup ecosystem in China is a criticism of Xi’s economic agenda. If China wants to maintain its technological preeminence, it needs comprehensive reform.
The disadvantaged private sector must be given the same status as state industries. The loss of transparency that clogs China’s financial markets must be reversed so that investors can regain confidence. Above all, Xi himself must realise that innovation does not follow administrative orders. Creativity flows when a hundred schools of thought compete.