China's Technology Sector Is Attracting Unprecedented Amounts Of Investment Despite Crackdown; What Changed?

While Beijing has begun targeting big tech Chinese companies, according to a recent analysis, China is pulling record amounts of investment into the country's technology sector.

When the Chinese government initiated a broad crackdown on the technology industry, concerned investors began to think about whether to invest or not and startup valuations began to tumble. As a result, China’s historic invention boom appeared to be coming to an end, but suddenly the scenario changed.

According to the data firm Preqin, venture capital investments in China hit over $130 billion in 2021—the investors put their money into more than 5,300 Chinese startups—and this was a new high for the country since it was about 50 per cent greater than the previous year's total of $86.7 billion.

This is an outstanding figure considering the fact that Alibaba, Tencent and Didi Global all of these Chinese tech behemoths faced massive pressure from the government, while the whole online teaching industry, which was once a hotbed for venture capital, was forced to become non-profit.

But hard-core technology such as semiconductors, robotics, and enterprise software has attracted the attention of entrepreneurs and venture capital firms, who have shifted away from softer internet enterprises. Last year, $14.1 billion was invested in biotechnology, a tenfold increase from 2016.

According to a report by Bloomberg, Jiang Jingjing, a lawyer who specialises in fundraisings at King & Wood Mallesons in Hong Kong, said: “Investors’ appetite for China tech remains intact. What has changed, however, is where they park their money. It has become quite clear that more and more funding has flowed to startups with cutting-edge technology.”

However, it needs to be understood that China is still lagging behind Silicon Valley in terms of venture capital investment. In 2021, the United States set a new high of $296.6 billion, more than doubling the Asian country's total. Nonetheless, China has already surpassed the competitor country in some essential technologies.

According to Preqin, Chinese chipmakers, integrated circuit designers and other semiconductor startups received $8.8 billion in funding in 2021, which is about six times the $1.3 billion invested in similar companies in the United States.

In President Xi Jinping's five-year economic blueprint unveiled in March 2021, this is probably how the central planners envisioned the growth. The Chinese Communist Party has denounced the corrupting impact of video games and online videos while advocating for increased funding for basic research. This shift is intended at reducing China's reliance on American suppliers, which is the main priority for the Chinese administration after critical companies like Huawei and SenseTime were blacklisted by the United States in recent times.

In the planner, Beijing outlined initiatives to expand national R&D investment by more than 7 per cent each year and identified seven technology domains where it intends to make significant breakthroughs, reported Bloomberg.

These domains include space exploration, brain science and quantum information, all of which are dominated by companies based in the United States. Beijing is also betting heavily on future technologies like hydrogen vehicles and biotechnology while striving to close the gap with Intel and Taiwan Semiconductor Manufacturing Co. in the semiconductor business.

However, there is no certainty that the strategy will be successful in the long term. By allowing exceptional entrepreneurs like Alibaba's Jack Ma and ByteDance's Zhang Yiming to select their own path to success, China has produced a generation of technological titans. Now that private-sector innovation has been subordinated to a model that is far more government-directed.

The shift to hard-core technology has been in the works since it began off in earnest in 2018 after Washington restricted American technology exports to ZTE Corp. With Huawei, China's top telecom company, being blacklisted, the initiative gained even more traction.

Angelo Yu, the creator of Pix Moving, which is a self-driving startup, told Bloomberg: “There is a sea change in investors’ attitude toward deep tech. In 2020, whether or not we could fundraise was still a question mark. This year, fundraising isn’t an issue anymore. The question has become at what valuation we’d like to raise funding.”

More talent has been drawn to entrepreneurship as a result of easier access to funding and increased demand for made-in-China digital solutions. For example, Yuan Jie, a professor at the Hong Kong University of Science and Technology, has founded a company called Atom Semiconductor Technologies in 2020. The business, which Yuan established to produce his own silicon, has raised two rounds of funding and doubled its worth, allowing him to monetise his years of research.

Additionally, Sinovation Ventures, a Beijing-based technology venture firm formed by former president of Google China, Kai-Fu Lee, wants to invest every dollar raised this year in deep tech and life sciences.

According to Gary Rieschel, the founding managing director of Shanghai-based Qiming Venture Partners, deep tech firms now make up around 40 per cent of his firm's portfolio—up from 10 per cent in 2014.