George Soros, the famous financier, said in Wall Street Journal on September 6, 2021, that Blackrock, the world's largest asset management firm, that investing in China is a tragic mistake, which may cause loss of money for BlackRock's clients and will damage the national security interests of the United States. We believe that Soros' vigilance towards Chinese investment reflects the attitude of some international investors, especially venture capital (VC) and private equity (PE) companies, towards Chinese investment in recent years: on the one hand, he is surprised at the growth of Chinese companies, especially technology companies, and on the other hand, he is afraid of unknown investing risks.
The key to solving this dilemma is to understand the changes taking place in China. In this analysis, we will focus on the participation of VC industries in the investment of Chinese companies and give some insightful views.
Funds' journal in China
Since the Opening of China, foreign direct investment (FDI) has been the main way to invest in China. Since 2000, with the rise of the Internet Wave, international VC investors began to participate in China's economic development. Some Chinese giants we are familiar with have global capital behind them. For example, MIH company is the largest shareholder (30.9%) of Tencent, Softbank group is the largest shareholder of Alibaba (24.8%), and DiDi (21.5%). It can be seen that international capital plays an important role in the early development of Internet companies in China. And the trend had grown rapidly before 2018, which was hitting a historical high.
However, in 2020, US venture investors participated in 247 venture funding events for Chinese startups, investing USD 2.5 billion, down over 50% from 2019 and far below the level of 2018, making the lowest level of US capital deployment in Chinese startups companies since 2013. Analyzing the boom in 2018, we found it was mainly driven by US participation in before-IPO fundraising rounds for Chinese technology giants like Ant Group (USD 14 billion in Series C), Pinduoduo (USD 3 billion in Series C), and Bytedance (USD 3 billion in Series D). However, in recent two years, as the regulation becoming harsher and harsher (e.g., The shutdown of the Ant Financial IPO), the momentum of 2018 did not sustain.
The top sector for US VC in China in 2020 was Financial and Business Services, with 54 unique funding rounds. One of the most prominent deals was BOSS Zhipin (USD 270 million in Series F). Health, Pharmaceuticals, and Biotechnology was the second-highest sector for US VC investment. The chart shows that investments in Information and Communications Technology (ICT) are in a low status at all times. It indicates that in recent years, Sino–US trade frictions around cutting-edge technology have had dramatic adverse effects.
Though China seems to be gradually easing restrictions (e.g., Special Administrative Measures for Foreign Investment Access in 2018, and Li Keqiang's talk about advancing the opening-up in the banking and insurance sectors in 2021), in recent years, with the continuous outbreak of regulatory events, more and more international investors (PE/VC/mutual fund) began to question the correctness of investing in China, George Soros is one of them.
'Fear of the unknown'
Analyzing the topics in media and discussion on the Internet, we think international investors' concerns come from three aspects...
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