The Problem With China's VC: An Opportunity amongst Chaos ?

China VC problem

Recent headlines has been pointing towards a major slump in Venture Capital and private equity money into China. According to Pitchbook, Venture capital investment in China was $26.7 billion with 3,072 deals in 1H of 2023, or an average of $8.69 million per deal, which is a huge decrease from the $40.9 billion at 3598 deals in 2H of 2023 with an average of $11.36 million per deal. At the same time, 1H 2023 data also falls short of 1H 2022 data with $28.6 billion invested into 2588 deals which averages at $11.06 million per deal. This could be explained by rising geopolitical tension between China and US which decreases investors confidence in the US and all around the world in 1H 2023.

On the fund raising side of things, venture capital environment is looking better then 1H of 2022 when the new fund raised by VC firms where only $8.9 billion as compared to 1H 2023 where new fund raised is at $28 billion according to pitchbook data. However 2H 2022 fund raised was at $43.9 billion (pic below).

This could be because sentiment were really terrible in 1H of 2022 because majority of the Chinese stocks were still on free-fall mode with no bottom in sight, but in October of 2022, the Hang Seng index rebounded alongside China's executive publicly reassuring the economy that they are nearing the end of the crackdown, which gave investors glimpse of hope, hence the surge in VC funding and investment. However in 1H 2023, US and China's relations were once again put to test with Biden's executive order which limits tech investment into China which forces international investors to pull back investments alongside and decrease mainland investors confidence and becoming more conservative as to where and when to deploy capital, hence lesser investments into venture capital and private equity especially in such volatile times.

1H 2022 & 1H 2023 new VC fund raised (Pitchbook )

Furthermore, it was also discussed in a CNBC article that these private equity and venture capital investments are returning lesser than adequate returns with only 3 USD denominated venture capital funds and 4 USD denominated private equity funds breaking-even if you invested between 2015 to 2020 because of a lack of IPO or buyout, disabling investors from cashing out. This portrays an environment with lack of liquidity and return which is bad for investing, which I believe is a major reason as to why there is sharp drop in both new fund raised and new investments. However according to KPMG, they are seeing more companies seeking IPO in 2H of 2023 which could help boost the VC market and will be a good indicator for other markets like the stock market which I will discuss more on in the next section.

An Opportunity ?

With the VC market now looking rather dim alongside the chinese and Hong Kong stock market being suppressed for quite some time already, it is safe to assume that investors have actively been avoiding these markets. However, recent economic data published showed that China's might actually be recovering. According to Trading Economics data, retail sales grew 4.6%, higher then the expected 3% and last report's 2.5% which indicates improving consumer sentiment which is good for companies earnings. Industrial production is also up by 4.5% , higher then the expected 3.9% and last report's 3.7% which indicates increasing manufacturing which could lead to more employment, and if this continues, it would definitely help ease the youth unemployment numbers that China have stop publishing. Apart from these, China have also announced a 25 basis point cut to bank's reserve requirement ratio which is the minimum amount of cash the bank must have as a percentage of their total deposits. This cut will reduce the weighted average reserve requirement ratio of China banks to 7.4%. This cut is likely aimed at fiscally stimulating the economy even further especially since previous stimulus were insufficient but were in the right direction.

China is looking like it is on the right track towards a slow recovery and the market is slowly pricing it in with majority of the indexes and major stocks in the HongKong stock exchange gaining 1-3%. It is also already made clear that the Chinese government wants an economy recovery and is slowly stimulating the economy through various means. However, there are still an indefinite amount of risk involved as the tension between China and US is still there and any policy shift could change an industry's future. However, there remains many lucrative opportunities in the Chinese stock market especially since many of them are very under valued and many of them that are listed in the Hong Kong stock exchange pay a rather high dividend, take for example HongKong listed Chinese bank stocks or telecommunication stocks which are all paying well over 5% in dividend and are far from their 5 year highs.