Venture capitalists haven’t given up on China in 2021 – but this year could be different

Regulatory headwinds in China have not dampened venture capitalist enthusiasm in 2021. But market watchers are bracing for a potential pullback this year.

Venture capital deal activity in China hit a near record high of $114 billion in 2021, according to the latest PitchBook report. The value and number of transactions in China were the second highest since 2015 – a fiery private market despite various crackdowns imposed by Beijing.

Investments abroad also increased last year. A total of 955 deals in the Greater China region had at least one investor outside of mainland China, Hong Kong, Macao and Taiwan, representing $55 billion in deal activity in 2021. More than 3 700 non-domestic venture capitalists participated in deals in China last year, according to PitchBook.

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

The optimism around China’s private markets contrasts sharply with the sentiment of state-owned companies. In 2021, the MSCI China Index plunged 21.6%, while the MSCI Emerging Markets Index fell only 2.2% and the MSCI ACWI Index jumped 19%. The poor performance of the Chinese stock market was largely due to the regulator’s tightening grip on tech giants like Alibaba, Tencent and Meituan, as well as a crackdown on the online education industry and the real estate sector.

However, in the private market, certain sectors are gaining momentum, despite the sluggishness of the public market. In 2021, Chinese biotech and pharmaceutical companies recorded a 32% increase in the number of deals and a 44% increase in deal value, “setting new records for every statistic,” according to the report.

But private investor sentiment could be altered in 2022 as China battles the worst Covid outbreak in two years and ponders its next regulatory moves. “Regulations put in place across a wide range of industries since 2017 are significantly limiting the growth of credit creation and the economy,” according to Jing Sima, chief strategist for China at BCA Research, a sister company to BCA Research. 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 shaky outlook for Chinese startups seeking venture capital investments. Venture capital fundraising activity in China fell 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 significantly affected the region’s venture capital market,” the report said. “That may still be the case as we have seen SoftBank and other large investors active in the region seek to temper expectations and announce that they will be taking a cautious approach in the region.”

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