Is Xi Jinping Undermining China’s Path to Tech Superiority?
By Deborah Lehr
November 16, 2024
The recent decline in venture capital (VC) investment in China has far-reaching consequences, not only for the startup ecosystem but also for the broader Chinese economy. Once a vibrant hub for entrepreneurial activity, China’s startup scene is now facing significant challenges as VC funding drops to its lowest levels in years. The decline in capital investment is stalling the creation of new businesses, affecting employment, and slowing the pace of technological innovation – factors that collectively threaten the country’s long-term economic trajectory and President Xi Jinping’s ambitions.
China’s venture capital market, which flourished through the 2010s, experienced a sharp slowdown starting in 2022. While this was part of a larger global slowdown, venture funding in China dropped by 36 percent year-over-year in 2023. These declines are particularly evident in sectors that were once darlings of Chinese investors, including technology and education.
Figure 1. Significant Decline in Capital Raised by China's Venture Capital Since 2022
Source: Statista Market Insights.
One of the major reasons for this decline is China’s stringent regulatory environment, which has affected a wide range of industries. The strict and often unexpected regulatory measures introduced by the government, such as the crackdown on technology giants and curbs on private education firms, have diminished investor confidence. Coupled with trade and political tensions and the tightening of global financial conditions, foreign venture capitalists are more cautious about pouring money into China.
As venture capital has dried up, the impact on startups in China has been immediate. New business formations sharply declined, stifling innovation and reducing competition. In 2018, China’s VC sector financed 7,180 early-stage companies. By 2023, this number had dropped to 2,780. In China, startups have traditionally relied on VC funding to scale rapidly; without that access, many promising young companies are either delaying their launches or failing to survive beyond the early stages.
Figure 2. Significant Decline in the Number of Deals in China's Venture Capital Sector
Source: Statista Market Insights.
The lack of fresh startups impacts leading sectors such as technology, biotech, and green energy. According to data from the Ministry of Industry and Information Technology, the number of new tech startups in China decreased by more than 20 percent from 2022 to 2023. The decline in venture capital and the corresponding reduction in startup activity directly impact China’s broader economic growth. Startups contribute disproportionately to job creation, especially in high-tech and emerging industries. According to the OECD, China’s small and medium-sized enterprises account for 98.5 percent of all businesses in China, contribute 60 percent of the GDP, and provide three-quarters of all jobs. When VC funding is plentiful, startups create jobs at a rapid pace, contributing to both employment and overall economic growth.
Perhaps the most critical impact of the decline in venture capital is its effect on China’s technology ambitions. China has pursued a strategy of technological self-reliance, with plans to become a global leader in areas such as artificial intelligence, semiconductors, and green technologies. Startups are integral to achieving this goal, as they are often the engines of disruptive innovation and rapid technological advancement.
With fewer startups being funded, the pace of technology breakthroughs is expected to slow. China thus risks falling behind in key areas, particularly in the face of growing competition from other countries like the United States, which continues to invest heavily in R&D and innovation. The decline in startup funding is also likely to reduce collaboration between Chinese firms and international companies, as foreign investors and innovators may view China’s shrinking VC market as a risk factor alongside geopolitical concerns.
Published by Basilinna Institute. All rights reserved.
