Investment in startups has fallen sharply in China as authorities put too much pressure on the technology sector

Investment activity in China has noticeably decreased, which casts doubt on the further development of its technology sector. Fundraising for investment in China by both foreign and domestic venture capital firms has fallen sharply since 2022, leading to a significant drop in the number of startups founded in China last year and this year, the Financial Times reported, citing data providers.

Electric car of the startup WM Motor, which went bankrupt in 2023. Image source: WM Motor

The Financial Times named two main groups of reasons for the decline in investment. The first includes macroeconomic factors such as the general slowdown in China’s economy following the outbreak of the COVID-19 pandemic and the bursting of the real estate bubble. The second has to do with economic regulation by the government, whose administrative crackdowns on leading private technology companies such as Alibaba and Tencent have hit their stock valuations and left investors deeply uncertain about Beijing’s attitude toward private enterprise.

In addition, the US-China standoff has scared off international venture capital from the Chinese market, in part because it has become more difficult to reach investors through listings on international stock markets.

As a result, Chinese students studying abroad see fewer opportunities to return to China in the previously expanding technology sector. There has also been a sharp increase in investment-related litigation. In August, local newspaper Caixin reported that leading state-owned venture capital firm Shenzhen Capital Group had filed 35 lawsuits against companies that mostly failed to go public by the deadline or repurchase shares.

If China wants to maintain its technological superiority, it needs large-scale reforms, writes the Financial Times. The private sector should receive equal status with the public sector. There is also a need to increase transparency for China’s financial markets so that investor confidence can be restored.

«First of all, Xi himself must realize that innovation does not follow administrative orders,” the Financial Times concluded.