Since the Chinese Communist Party lifted its “zero-COVID” policy, more and more American investors have been leaving China. At the same time, American capital flowing into Chinese startups has been drying up.
Data from PitchBook tracking startup companies shows that from 2021 to 2023, transactions involving Chinese startups, including American investors, decreased by 88%, from $47 billion to $5.6 billion.
This situation starkly contrasts with the influx of American investors into China 20 years ago.
According to a report by the Hong Kong-based South China Morning Post, industry insiders and market data indicate that the venture capital industry in China is undergoing a significant transformation, signaling the end of a 20-year relationship between American investors and mainland Chinese startups.
American venture capital firms are pulling out, some separating their Chinese operations from their U.S. operations, while others are ceasing new investments in China.
New York University law professor Marvin Yan told the South China Morning Post that this “cycle has been broken,” and the distance between American funds and Chinese tech startups will further widen.
Meanwhile, Washington is ramping up scrutiny of American investments in various sectors such as semiconductors, artificial intelligence, and quantum computing.
Venture capital firms like Sequoia Capital, Qiming Venture Partners, Qualcomm Ventures, and Walden International faced investigations by a U.S. congressional committee in 2023 for their investments in sensitive technology sectors in China.
In an interview with Voice of America, Mr. Liu, who is involved in cross-border investments between the U.S. and China, said that since Beijing lifted its “zero-COVID” policy, more familiar American investors are leaving China.
“American investors place particular emphasis on assessing risks between countries,” he said.
Explaining why foreign investors are responding tepidly to Beijing’s welcoming signals, Mr. Liu said, “American investors don’t just believe your government’s words instantly; they observe how you act, they look at your behavior not just for a day or two, but even for a year or two.”
Twenty years ago, Silicon Valley banks led the first group of 25 American investors to visit China, where they were treated to red-carpet receptions.
Sequoia Capital began investing in China in 2005. Bloomberg quoted an individual present at the time, saying that during Sequoia Capital’s then-CEO Doug Leone’s first visit to China in 2005, he found a red carpet laid out on the ground when he opened the car door. The unnamed individual said Leone got out of the car, walked to the building to meet with Chinese tech leaders, and along the way, saw uniformed guards saluting.
Subsequently, Sequoia and numerous other venture capital companies established branches in China.
Sequoia Capital alone invested in over 1,200 Chinese startup companies. In 2023, due to geopolitical tensions, U.S. companies split their Chinese operations into an independent entity called “Sequoia China.”
As geopolitical tensions escalated, with increasing restrictions imposed by both China and the U.S., many American venture capital firms have shrunk their investment activities in China.
According to data from research firm Dealogic, foreign capital inflows into China’s venture capital industry plummeted by 60% to $3.7 billion in 2023, merely 10% of the peak in 2021.
In addition, local Chinese governments and state-owned enterprises have intervened in the venture capital industry and emerged as significant participants, radically altering the industry landscape.
According to data compiled by China-based research firm Zero2IPO, by 2023, China had established 2,086 government-guided funds with a target size of $1.22 trillion, with committed capital around $713 billion.
The expansion of state-sponsored funds has sparked debates on the future of China’s venture capital industry, as these funds typically avoid risks and prioritize local investments. Meanwhile, as state entities advance, private investors retreat, accelerating the withdrawal of market-led capital.
Wang Ran, founding partner and CEO of Yikai Capital, said in a recent speech that China’s primary capital market is dead because government funds now dominate and are highly sensitive to losses.
The South China Morning Post cited an anonymous executive in Shanghai’s Chinese venture capital industry who said that many companies are struggling to adapt to the style of state investors, a transformation that is not easy.