China’s internet sector sees steep drop in funding amid rising geopolitical and regulatory risks

  • The plunge in funding follows an intense period of regulatory action that has targeted some of China’s biggest internet companies
  • Tougher audit requirements for US-listed Chinese companies have also clipped the exit options for US dollar-denominated funds in China

Funding for China’s internet companies at the beginning of this year dropped sharply, as start-ups and venture capital firms navigate an uncertain regulatory environment, ongoing geopolitical tensions and slower industry growth.

In the first quarter of 2022, the number of fundraising deals in China’s internet industry declined 38.3 per cent year over year, while fundraising volume plunged 76.7 per cent, according to a report published on Tuesday by the China Academy of Information and Communications Technology (CAICT).

China’s internet companies, which raised more than US$15 billion in the first quarter in 2021, raised only US$3.51 billion in the same period this year, according to CAICT, a state-run think tank that reports to China’s Ministry of Industry and Information Technology (MIIT), one of the country’s major regulators of the technology industry.

CAICT data shows that the decline of fundraising activity in China’s internet sector started in the second half of last year, when internet companies raised US$8.46 billion and US$6.12 billion in the third and fourth quarter respectively.

The plunge in funding follows an intense period of regulatory action in the summer of 2021 that targeted some of China’s biggest internet companies, including ride hailing giant Didi Chuxing, e-commerce giants Alibaba Group Holding and Meituan, and the elimination of the entire private school tutoring industry.

At the same time, companies hoping to go public on US stock exchanges, traditionally one of the most attractive IPO destinations for Chinese internet start-ups, are facing scrutiny by regulators in both the US and China over audit inspections as tensions between the two countries persist.

That has clipped the exit options for US dollar-denominated funds in China, which in the past decade have been major growth drivers for China’s internet companies.

“A blurry exit path ahead has hit investor confidence in both early and later stage start-ups heavily,” said a partner at a Chinese venture capital firm that manages US$1.2 billion, who asked not to be named as they are not authorised to speak with media.

Money invested by US dollar funds into China’s new economy start-ups in the first quarter dropped 64 per cent year over year, according to a report published earlier this month by Chinese start-up database ITjuzi.

US dollar funds in China also face increasing challenges in raising money from limited partners, who are becoming cautious on adding China investment against the backdrop of rising geopolitical tensions, leading to a sharp drop in new capital coming into the country, the partner added.

“Global investors have been reducing their exposure to the China market amid a series of negative developments, including economic slowdown, stringent lockdown measures and a regulatory clampdown, which have dampened investor confidence,” said Ethan Sun, an investor at a China-focused investment fund.

Sun added that the internet market had matured in China and the amount of capital that can be deployed is smaller than before. “However, we remain confident on China’s prospects and will continue to invest in companies that can benefit from the country’s growth and transformation,” added Sun.

Among all internet industries, the two sectors that received the biggest levels of funding in the first quarter were enterprise services and healthcare, according to CAICT.

Author: Xinmei Shen, SCMP

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