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China’s startup funding: Biggest victim of COVID, regulatory crackdowns

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Aurojyoti Bose stated that the average capital size of venture capital projects launched in China during 2022 decreased noticeably

Due to regulatory pressure on the technology sector and a strict zero-COVID policy, venture capital (VC) funding in Chinese startups decreased by 46.4% to USD 57.4 billion in 2022 from USD 107 billion in 2021, according to data and analytics firm GlobalData.

The financing transactions decreased by 14.4%, from 4,388 in 2021 to 3,755 in 2022.

According to Aurojyoti Bose, Lead Analyst at GlobalData, the sharp fall in venture capital funding value is a sign of the cautious mindset of the investors.

He continued that the average capital size of venture capital projects launched in China during 2022 decreased noticeably.

Regarding the number and value of venture capital investment deals, China is the largest Asian-Pacific market and one of the top four international markets. In 2022, it represented 14.1% and 13.6% of the total value and volume of VC funding worldwide.

However, out of the top four markets—the US, the UK, and India—China had the worst fall.

Other significant international markets, including the US, UK, and India, had a fall in VC funding value of 40.8%, 24.3%, and 38.2%, respectively, year over year, according to GlobalData.

However, the scene is completely different for the new energy and semiconductor industries, which are expected to be stand-out performers in 2023 after landing the biggest deals of 2022.

Investment in China’s new economy sector, made up of tech-driven industries, slipped 46% to 745 billion yuan (USD 110 billion) in 2022, according to market intelligence firm ITjuzi. Data from CB Insights shows a similar trend, with venture funding in the country down by more than half to USD 47 billion in 2022.

Big Tech companies, identified as major drivers of tech and internet funding in China, have been slowing down since the COVID outbreak. Tencent Holdings and ByteDance backed 93 and 21 companies in 2022, respectively, down significantly from the 259 and 64 deals they made in 2021, according to data compiled by local tech blog LeiNewspaper.

“The capital market was hesitant under the shadow of the pandemic,” ITjuzi analyst Zhi Jiaming informed the South China Morning Post.

A combination of China’s economic slowdown, COVID-19 restrictions that were only eased in 2022 December, and recent crackdowns on the tech sector have dampened investor confidence.

Beijing pledged in 2020 to prevent the “disorderly expansion of capital”, which was followed by two years of unprecedented regulatory crackdowns on the country’s biggest tech firms, covering business activities from content and data security to mergers and acquisitions.

However, the business environment is expected to improve in 2023. The Central Economic Work Conference, an annual meeting of China’s top leadership that concluded on December 16, 2022, said that the Xi Jinping government will look to internet platforms to play a role in reviving the country’s slowing economy.

The good news for investors in 2023 is “the ease of pandemic controls and Beijing’s vow to make economic development a priority. But the tech giants will continue to reduce their external investment this year, and it takes time for the economy to recover before investor confidence recovers,” ITjuzi senior analyst Wu Meimei said.

Wu Meimei also expects the tech start-up investments to revive in the 2023 second half.

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