Will China’s venture capital market become investable again?

[SINGAPORE] “No one likes to talk about a falling market” is a lesson I learnt early in my career as a financial journalist.

When the gold price cratered to US$250 per ounce in 2001, traders I called for my daily market comment told me to stop doing so. “There’s nothing going on,” was the common refrain.

If the adjective “uninvestable” was as commonly used back then as it is now, it would have been an apt description of gold. The precious metal has since shrugged off that tag, as demonstrated in its steady ascent to record highs this week.

China’s venture capital (VC) market – where investors finance startups and early stage businesses that show high-growth potential in exchange for equity or ownership stakes – now brings back memories of those dim days for gold.

Here’s why. Having shrunk every year since 2021, VC funding in China has plunged 36 per cent between January and August this year, compared with the same period in 2024, according to GlobalData.

The decline narrows China’s share of the global VC market to around 7 per cent, half of the 14 per cent in the same period last year, the London-based data analytics company said on Sep 24, without providing specific figures.

Aurojyoti Bose, lead analyst at GlobalData, said that the steep decline in funding value “points to a slowdown in big-ticket rounds and persistent investor wariness. Macroeconomic uncertainty, geopolitical tensions and regulatory pressures have further dampened sentiment, curbing appetite for big deals and driving more conservative investments”.

Lowest in more than 10 years

KPMG, which issues quarterly reports on global VC activities, said in July that second-quarter deal value in China – still the world’s second-biggest VC market – fell to US$4.7 billion, its lowest in more than a decade.

The drop in VC deal values in China largely mirrors a global trend since 2021, when low interest rates and pent-up demand from Covid fed a boom. But while global VC deal values have risen year on year since the last quarter of 2024, China’s has gone the other way.

Market participants attribute this to the US Outbound Investment Rules, which came into force on Jan 2.

The rules limit investments by US companies in sectors comprising semiconductors, artificial intelligence (AI) and quantum technologies in China. While prohibiting certain transactions, the regulations also require notification for others.

These have led “to a reduction in US investment in these sensitive Chinese technology sectors, thus shrinking the pool of capital available for large investment rounds in these areas”, Amy Yin, partner at law firm Reed Smith, told The Business Times.

The trade tensions with the US, together with the well-televised economic challenges in China, have led many pre-initial public offering (IPO) and consumer deals in China that were very popular five years ago, to “suddenly disappear”, said a market player.

Investors have thus shifted their interest, along with their funds, to other countries within Asia, such as Japan, India, Australia and South Korea.

Few commentators

Given this backdrop, it is small wonder that few are willing to talk about China’s VC market. At least half a dozen VC players declined to comment for this story.

At a high-profile regional private markets and VC conference in Singapore in mid-September, a panel on cross-border investments that featured two speakers based in Greater China spoke to a near-empty room. In contrast, another session held concurrently on Japan’s private markets was greeted by a full house.

Amid dwindling interest from foreign venture capitalists, China’s government has stepped up to provide funding. 

In March, China announced a national VC guidance fund that is expected to attract one trillion yuan (S$181.3 billion) from local governments and the private sector in the next 20 years.

State funding has sparked activity in yuan-denominated VC funding. But this could be difficult for market-oriented VC fund managers to manage, said Jay Tai, partner at Stephenson Harwood. 

Still, given the expansive China market, there are areas where VC activity is picking up this year.

In particular, after Chinese AI firm DeepSeek stunned the tech world earlier this year with its ability to compete with the US’ ChatGPT, investments in China’s deep-tech industry such as AI, robotics and cloud are showing positive signs.

Market cycles turn

Also helping support investor sentiment somewhat is the booming IPO market in Hong Kong. IPOs, which offer an exit avenue for those invested in more mature private companies, can do the same for VC-backed startups.

Hong Kong share sales – including IPOs, placements and block trades – have raised US$51 billion between January and mid-September, based on data compiled by Bloomberg. This puts them on track to close 2025 at a four-year high. The charge has been led mainly by Chinese companies.

“Now with Hong Kong listings… becoming active, we expect such exits to help activate the VC market again in China,” said Tai.

Sean Low, chief executive officer at Singapore-based private equity fund Golden Vision Capital, is one of the few who professes being optimistic about China. He told BT that the company is still invested in the country, particularly in the advanced manufacturing sector, as it is optimistic about the exit opportunities in the next three to five years.

Low, who served as senior vice-president at Singapore sovereign wealth fund GIC from 2004 to 2021, added that China “should not be overlooked, as all market cycles turn”.

Indeed, VC investors would hope the market could become investable again, like the country’s onshore equities. A US$2.7 trillion equity rally this year has led China’s stock markets to shed the “uninvestable” tag, drawing back global hedge funds and money managers.

Yin at Reed Smith is more cautious. Despite the positive performance of Greater China’s equity markets, “there is still no clear forecast of the exact timing of a market bottom”.

“The VC market could stabilise or begin to recover, contingent on continued government support translating into actual deal flow; improvement in China’s broader economic outlook; and easing of US-China tensions.”