VC and PE Play Key Roles in China's Start-Up Funding Recovery

VC and PE Funding Trends in China

Funding for start-ups in China remains at a low point, although the amount raised in the first half is already more than 50% of 2023's total, suggesting a potential recovery, according to data from mergers and acquisitions (M&A) intelligence provider Mergermarket.

The amount raised in the country peaked at $132.7 billion in 2021, then dropped to $67 billion and $45.4 billion in 2022 and 2023 respectively, according to data presented at the company's AVCJ Private Equity Forum China.

Signs of Recovery in Funding

From January to June this year, total start-up funding raised in China reached $25.7 billion. Although the market remains sluggish, there are indications of a possible recovery this year.

“Funding in China may see a slight recovery this year after two years’ decline since 2021,” says Yiqing Wang, managing editor at Mergermarket in Asia-Pacific.

The Shift to Domestic Funds

Another trend is the diminishing role of dollar-denominated funds. In the first half of 2024, dollar-based funds raised $2.6 billion, accounting for only 2.5% of the total, a stark decline from the 44% in 2021.

Washington's increased scrutiny of US investments in specific Chinese sectors, such as semiconductors and artificial intelligence, has created a challenging environment.

Impact of Regulatory Changes

Some US investment houses, such as Sequoia Capital, have separated their Chinese and Asian operations, recently rebranding as HongShan.

Fang Fenglei, founder and chairman of private equity firm Hopu Investment Management, noted that foreign funds are expected to play a more significant role as regulations welcome dollar-denominated funds back into China.

This June, the State Council initiated measures aimed at attracting VC investors, including easing foreign exchange management to facilitate venture capital transactions.