Another sign of China's rise.
For the first time ever, China has overtaken North America in the funding of start-up companies. According to Goldman Sachs, Chinese-based companies attracted $30.9 billion in venture capital in the second quarter of this year, ahead of North American rivals, at $27.2 billion.
While the surge in fundraising can be partly attributed to Alibaba’s affiliate Ant Financial, which cashed in about $14 billion in the largest deal ever recorded globally, Chinese venture capital activity has been particularly heightened in recent years. “A catalyst for this spike is China 2025, a strategic initiative announced by President Xi Jinping to accelerate the transformation of the country’s economy away from low-end manufacturing toward innovation and higher-value technology,” says Arthur Dong, a professor of strategy and economics at Georgetown University’s McDonough School of Business. “Borrowing a playbook from Japan, China has experienced diminishing returns from focusing on low-cost manufacturing and needs to enter higher-value-added activity in order to sustain its economic vitality.”
China’s policymakers, Dong notes, have always played a central role in steering China’s economy. “Through the use of directed investment, China’s banks and institutions have the ability to channel funds to industry sectors that are granted high priority in accordance to government dictates,” says Dong.
Notably, while the number of venture capital rounds completed last quarter in China increased almost fourfold compared with the same quarter last year, some estimates suggest that seed funding in Silicon Valley fell by about 60% in recent years.
This change in power dynamics between the US and China, however, won’t be easy to sustain. For Chinese investment firms, taking the quick route of pouring funds into successful American start-ups is no longer easily attainable, either. “The recent Defense Authorization Act closed a regulatory gap, thus making it harder for Chinese-based entities to invest in US-based ventures using the VC route,” says Dong.
Down the road, he adds, advancing the China 2025 plan will have its challenges. “Doing so will require China to create homegrown technology companies and national champions in key industries,” he says.