China is rolling out the red carpet for venture capital in tech – and foreign funds are welcome

China’s State Council has put out a call for venture capital to invest in the country’s tech sector, with incentives for funds both foreign and domestic

China economy

Amanda Lee

Published: 6:30pm, 20 Jun 2024

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China plans to roll out new measures to coax venture capital (VC) – including funds based overseas – into the country’s technology sector, according to a notice from the State Council, the national cabinet.

International investors will be incentivised to set up yuan-denominated funds within China to facilitate domestic investments, the council said in the notice issued Wednesday, which named foreign backers’ investment experience and service strengths as reasons for the move.

The council also said the management of foreign exchange would be “optimised” further, making it easier for VCs and other business entities to handle transactions.

Qualified institutions will be encouraged to issue corporate bonds and debt financing instruments to help fund their investments, and state-owned enterprises will be supported as they devote resources to industry leaders in advanced technologies. China will also support insurance institutions as they make their own investments in VC funds.

“Developing venture capital is a key step to promoting the virtuous cycle of technology, industry and finance,” the cabinet said.

As global supply chains become subject to fragmentation, the venture capital landscape is also undergoing the same constrictions

Alex Capri

China also plans to expand its pilot programme for Qualified Foreign Limited Partnerships (QFLP) and guide foreign institutions to conduct cross-border investment within the scope of regulations, according to the council.

The QFLP mechanism allows foreign investors to invest in a yuan-based fund in China’s private equity market, an activity previously limited to domestic parties.

The notice comes in the wake of a rare meeting between President Xi Jinping and prominent entrepreneurs last month, where according to Communist Party media outlet People’s Daily the president asked why the number of new unicorns – start-ups valued at more than US$1 billion – had dwindled.

Despite state-driven initiatives to attract more foreign VCs, geopolitical headwinds will make this a difficult task, said Alex Capri, a senior lecturer at the National University of Singapore.

“As global supply chains become subject to fragmentation due to decoupling and de-risking efforts, the venture capital landscape is also undergoing the same constrictions,” Capri said.

Last year, US venture fund Sequoia Capital split its business to avoid the potential fallout from worsening bilateral relations, establishing an independent Chinese entity.

Capri said the US Outbound Investment Transparency Act, which requires US entities to notify the federal government of investments in sensitive technologies in “countries of concern”, has created a roadblock to investment in China.

Various data points show a decline in China’s count of unicorn firms. The number of VC funds, as well as the total size of their investments, have also been on a downward trend.

In 2023, 56 new unicorns were established in China according to the Hurun Global Unicorn Index, down from 107 in 2022.

Meanwhile, a total of 8,322 new funds were established in China’s VC and private equity market in 2023. This was a year-on-year decrease of 4.7 per cent according to a June 9 report by CVINFO Institute, a unit of Beijing-based China Venture Investment Consulting.

Newly established VC funds in China totalled US$614 billion in 2023, marking a year-on-year decrease of 9.4 per cent and a second consecutive year of decline.