Even Billionaires Are 'Ordinary People' Before the Communist Party... Chinese Tech Companies Halved in Value in Half a Year [Tech Talk]

Investment Reduced by 50% Compared to Average Years
Economic Crisis, Policies, and External Risks Combined
Can Party-Led Innovation Succeed?

According to data analyzed by the Financial Times (FT) last September, venture capital (VC) investment in Chinese startups over the first six months of this year has decreased by 50% compared to the historical average. It has plummeted by 82% compared to 2021, when China's tech boom was at its peak.

Until last year, China's innovation ecosystem ranked second in the world. However, as VC funds have been depleted at an unprecedented pace, China's status as a startup paradise is now under threat. What exactly is happening?

The Global VC Big Three: China Shakes

China is still considered one of the top three global tech VCs alongside the United States and the United Kingdom. Reuters Yonhap News.

By June this year, Chinese startups had attracted a total of $26 billion (approximately 37 trillion KRW) in VC investments. While China still holds the second position globally, the gap with the United States ($80 billion, approximately 116 trillion KRW) has widened significantly, and the gap with the third-ranked United Kingdom ($10 billion, approximately 14.5 trillion KRW) is narrowing. If the current pace of capital outflow continues, China may eventually fall out of the global innovation ecosystem dominated by the US, China, and the UK.

Startups worldwide have been hit hard this year due to the ripple effects of global interest rate hikes. VC investments have decreased in nearly every country, not just China. However, the speed of contraction in China is uniquely pronounced.

Foreign media such as the FT attribute this to several factors: the prolonged US-China tech competition, asset crises in mainland China including real estate, and policies under Chinese President Xi Jinping.

In fact, the US government has repeatedly introduced regulations to prevent domestic VCs from investing in China's core technologies, and President Xi's so-called "big tech crackdown" policy last year contributed to the downturn in China's tech sector. However, the real reason for the slump in Chinese VC is not foreign investors but the contraction of domestic VCs.

The US-Nurtured Chinese Tech Industry

As public scrutiny in the United States intensified, American VCs who laid the foundation of the Chinese startup scene, such as Sequoia, have withdrawn. Photo by AP Yonhap News

China's tech ecosystem was clearly born from the hands of the United States. In the past, leading Silicon Valley VCs like Sequoia sought markets with higher potential investment returns and discovered Chinese internet entrepreneurs. The "first generation of Chinese IT entrepreneurs," who grew by receiving funds from American investors, directly imitated Silicon Valley strategies.

The operational model of securing large numbers of talents through benefits like stock options instead of base salaries, and even tax avoidance methods, followed those of American companies. A representative figure among these first-generation IT entrepreneurs is Jack Ma, founder of Alibaba Group.

However, after these first-generation companies became the big tech giants dominating the Chinese market, foreign capital was replaced by Chinese capital. Chinese IT companies used abundant capital to establish their own "accelerators" (startup incubators), which became the foundational nutrients of China's tech ecosystem.

Even IT Billionaires Are Powerless Before the Communist Party

However, there was one important difference between China and the US: unlike the US, China’s state influence deeply permeates even the private industrial sector.

A representative case is Jack Ma, who was summoned for multiple investigations after making remarks in 2020 that "targeted" the Chinese Communist Party's strict financial regulations. Subsequently, Ant Group's (Alibaba's affiliate) initial public offering (IPO) was effectively postponed indefinitely, and Ma's corporate stake was reduced from 50% to less than 10%, stripping him of control. This clearly demonstrated that even entrepreneurs who amassed tens of trillions of won in wealth are merely "ordinary citizens" before the Party.

Jack Ma, the founder of Alibaba and once a key figure in China's tech success story. Photo by Yonhap News

Some argue that, in light of that incident, China's tech ecosystem is not "disappearing" but "being readjusted." Countries where startups thrive, such as the US and UK, generally focus on software and services. Anglo-American big tech companies like Google, Meta, and Revolut are also software businesses.

However, Chinese authorities want the country's tech ecosystem to focus more on hardware than software, and on technology rather than business. Especially now, with the urgent need for a "semiconductor rise" due to extensive US technology sanctions, this desire is bound to grow even stronger.

Therefore, instead of big tech companies nurturing the next generation of startup leaders as accelerators, they are spending more on internal research and development (R&D), and private investors must invest in manufacturing sectors such as electric vehicles, semiconductors, and machinery equipment rather than internet businesses. Manufacturing requires much more initial capital than internet businesses. The state, as a major player, must actively provide investment incentives.

A New Innovation Ecosystem Where the Party Leads and the Private Sector Steps Back

Chinese President Xi Jinping. Photo by Yonhap News

However, the new innovation strategy where "the private sector steps back and the Party leads" is a double-edged sword. If the Chinese government's active tech investments foster strategic technologies, China may not only achieve technological self-reliance but possibly surpass the US innovation ecosystem.

But historically, public investment has often been less efficient than private investment. A tech ecosystem led by the Party rather than the market risks becoming more rigid and less innovative than before.

The risks accompanying these changes are most keenly felt by private investors currently active in China. Camille Boulnois, an analyst at the Chinese capital market consulting firm Rhodium Group, told the US financial media CNBC, "China's private science and technology development is increasingly 'aligned' with government priorities. This may be effective in the short term, but it is uncertain whether it can create a sustainable innovation ecosystem in the long term."