The Chinese Communist Party (CCP) is cracking down on the financial industry, causing entrepreneurs to become increasingly risk-averse. Even industries that Beijing deems crucial to national security are struggling to attract investments. At the same time, the CCP is leading research in quantum technology, but its isolation from the world and insistence on going it alone could widen the gap in quantum technology between China and the United States.
Venture capital plays a crucial role in modern technological innovation. With the CCP’s emphasis on “hard technology,” Chinese venture capital is shifting towards sectors like semiconductors, artificial intelligence, aerospace, and new materials, as reported by mainland Chinese media.
According to the China Securities Investment Fund Industry Association, in 2021, the number of investment cases in the fields of computer applications, biopharmaceuticals, semiconductors, medical devices, and services accounted for as high as 70.62% of new venture capital investments.
However, as the CCP tightens its grip on the financial industry, entrepreneurs are becoming more risk-averse. Data from Dealogic shows that in 2023, venture capital investment in China decreased by 66% compared to 2021. By the end of May 2024, it had dropped by 30% compared to the same period the previous year, with no signs of stopping.
Foreign venture capital investments, especially those involving American institutions, decreased nearly 90% compared to 2021, reflecting the growing divide between China and the US.
Chinese venture capital institutions are also withdrawing. The Financial Times reported that prominent Chinese private equity funds such as Sequoia Capital and Hillhouse Capital have either increased overseas investments or actively sought trading opportunities in markets like the US and Europe.
Companies and investors in China who struggle to secure financing are seeking opportunities abroad. According to Nikkei Asia, many entrepreneurs and technical professionals have already shifted from China to Japan.
With the departure of foreign capital, domestic venture capital has become more cautious. Local governments, typically a source of risk capital, are facing financial deterioration, further deepening the crisis.
In 2018, during the peak of venture capital investment, China established 51,302 startup companies. By 2023, this number had dropped to 1,202.
Funding for biotechnology and pharmaceutical startups in 2023 decreased by 60% from the peak in 2021, totaling around $18 billion.
According to a recent report by technology consulting firm ICV on “US-China Quantum Industry Financing Comparison,” Chinese enterprise venture capital funding faces challenges with sustainability, with about two-thirds of quantum startups having gone over a year without funding.
Sebastian Mallaby, a senior researcher at the Council on Foreign Relations, pointed out the existing “debt thinking” in China’s venture capital industry, suggesting that “cutting-edge technology experiments that could drive China towards the technology frontier may decrease.”
Quantum Insider predicts that by 2035, quantum computing will bring about $1 trillion in economic value. Without a robust community of quantum startups, China risks losing tens of trillions of dollars from the global quantum technology ecosystem.
Sun Guoxiang, Associate Professor of International Affairs and Business at Nanhua University in Taiwan, highlighted the critical role venture capital plays in high-tech development, specifically in areas like artificial intelligence, quantum computing, and electric vehicles. These investments provide much-needed funding support for innovative companies, accelerating the commercialization and scaling of technology.
Sun Guoxiang noted that the CCP’s crackdown on the financial industry has made entrepreneurs increasingly cautious and risk-averse. A lack of investor confidence could lead to scarcer funding, hindering research and application in quantum technology. While Chinese media call for increased funding for quantum technology from social capital and venture capital, achieving this goal remains challenging.
Taiwanese macroeconomist Wu Jialong expressed that in emerging fields with intense technological fluctuations, the development of high-risk venture capital endeavors must be led by private enterprises. Private enterprises are better suited to assess market opportunities, seek talent, design capital structures, and organizational frameworks.
He emphasized that venture capital cannot operate under socialist principles, as socialism’s economic mindset emphasizes seizing power through party organizations rather than the competitive capitalist model. State-owned enterprises are also ill-suited for involvement, as their risk-taking is best handled by private entrepreneurs.
In 2022, research and analysis company GlobalData indicated that in the United States, private companies lead quantum research, while in China, specialized knowledge is increasingly concentrated within government institutions.
The Chinese government has invested significant funds in quantum technology development. McKinsey estimates that by 2022, the CCP had announced a total of $15.3 billion in funding. Quantum Insider suggests that the CCP’s investments range between $4 billion and $17 billion.
However, private sector investments in quantum technology in China lag behind. McKinsey estimates that between 2001 and 2022, Chinese quantum startups received only $482 million from the private sector, a small fraction compared to US private sector investments.
According to the latest report from the Information Technology and Innovation Foundation (ITIF), China’s government control over quantum research is tightening, reducing private sector participation. Companies like Alibaba and Baidu have already exited quantum research.
Wu Jialong pointed out that in the field of high-risk venture capital enterprises in rapidly changing technology fields, it is essential to have private enterprises driving the initiative. Private enterprises are better equipped to assess market opportunities, talent acquisition, design capital structures, organizational frameworks, and more.
He emphasized that venture capital in China must not adopt socialist or state-owned models, which can hinder innovation and progress.
Wu Jialong mentioned that open competition leads to innovation, and China’s closed-off approach may restrict technological breakthroughs, eventually resulting in lower-quality products for Chinese consumers.
Wu Jialong stated that instead of embracing competition and global integration, China’s structures might lead to internal, inefficient cycles, where technological advancements stagnate, wasting time and resources on subpar products.