Venture Capitalists Didn’t Give Up on China in 2021 — But This Year Could Be Different

Uncertainty looms for private market investors as the country battles Covid and an evolving regulatory landscape.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

Regulatory headwinds in China did not douse venture capitalists’ enthusiasm in 2021. But market watchers are bracing for a potential pullback this year.

Venture capital deal activity in China reached a near-record high of $114 billion in 2021, according to the latest PitchBook report. Both deal value and deal count in China were the second-highest since 2015 — a heated private market despite various policy clampdowns imposed by Beijing.

Overseas investment was on the rise as well last year. A total of 955 deals in the Greater China region had at least one investor outside of the China mainland, Hong Kong, Macau, and Taiwan, accounting for $55 billion deal activity in 2021. More than 3,700 non-domestic venture capitalists participated in deals in China last year, according to PitchBook.

“As private investment has become more global, Greater China remains a focal point of global investors,” the report said.

Optimism around China’s private markets stands in stark contrast to public company sentiment. In 2021, the MSCI China Index plunged 21.6 percent, while the MSCI Emerging Markets Index was down a mere 2.2 percent and the MSCI ACWI Index surged 19 percent. The poor performance of the Chinese equity market was largely driven by the regulator’s tightening grip on tech giants like Alibaba, Tencent, and Meituan, as well as crackdowns on the online education industry and the property sector.

In the private market, however, certain sectors are gaining momentum regardless of the sluggish performance in the public market. In 2021, Chinese biotech and pharmaceutical companies saw a 32 percent increase in deal count and a 44 percent hike in deal value, “setting new records for each statistic,” according to the report.

But private investors’ sentiment might be impaired in 2022 as China battles with the worst Covid outbreak in two years and ponders its next regulatory moves. “The regulations put in place in a wide range of industries since 2017 significantly constrain growth in both credit creation and the economy,” according to Jing Sima, chief China strategist at BCA Research, a sister company of II. She added that the Covid situation in the country will likely “weaken the effectiveness of policy easing” in 2022.

Some indicators have already painted a precarious outlook for Chinese startups seeking venture investments. The VC fundraising activity in China was down from $60 billion in 2021 to $37 billion last year, the lowest since 2016, according to PitchBook.

“The government’s tightening of regulations surrounding foreign IPOs should have drastically affected the area’s venture market,” the report said. “That may still be the case, as we saw SoftBank and other large investors active in the region look to temper expectations and announce they would take a cautious approach to the region.”