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China venture capital deals seen recovering from 3-year lows

BEIJING/HONG KONG : Venture capital investment in China will likely recover gradually in 2023 after a year of battering by the country's severe pandemic controls, a share market slump and China-U.S. tension, dealmakers and investors said.

As COVID-19 restrictions come off, boosting the economy and maybe the share market, the number of deals should rise, they said. The recovery in activity would follow likely announcements of new economic and industrial policies and, crucial for foreign investors assessing possible Chinese deals, a reopening of borders.

"The restoration of market confidence will be gradual," said Maggie Qi, executive director at Chinese investment advisory firm CEC Capital, who expects pent-up investment demand to resurface in the second half of next year.

Just $73.5 billion in venture capital investments was made in China in the first 11 months of 2022, down 42 per cent from a year earlier and the least since 2019, data from industry consultancy Preqin shows.

Fewer than 10 unicorns - private companies valued at $1 billion or more - emerged from January to early October, compared with 44 in all of 2021, according to data firm CB Insight.

Venture capital activity was also lower than last year elsewhere in the world, held back by a sell-off in equity markets and rising interest rates.

China began easing pandemic controls in November, raising hopes for 2023 economic recovery after the potential disruption of a short-term case surge.

Venture capital activity could also warm up if there is a continuation of the past few weeks' strengthening in the Chinese stock market, said Will Cai, partner and head of Asia capital markets at law firm Cooley. Investors in private market used public share prices as a guide to valuations and which sectors might outperform, Cai noted.

China's CSI300 index is still down about 20 per cent this year.

Many venture capitalists are also nursing losses on Chinese portfolios as a result of a sweeping regulatory crackdown in 2021.

INTERNATIONAL TENSIONS

Some dealmakers and investors said they assumed one negative factor would linger next year: tension between the United States and China.

Investor appetite was dampened in 2022 as the United States further restricted China's access to certain semiconductor chips. Also, regulators in the United States have not yet determined whether U.S.-listed Chinese companies are compliant with U.S. rules, following inspections of their China-based auditors this year. 

As China tries harder to be independent of foreign advanced technology, venture money will see value next year in start-ups in core tech sectors, such as advanced chips and new materials, dealmakers and investors said.

Sources told Reuters that China was working on a support package for its semiconductor industry worth more than 1 trillion yuan ($140 billion).

The new-energy sector, boosted by China's push for carbon neutrality, would also be promising, said Anna Xu, founding partner at the China-focused HIKE Capital, adding that increased new-energy vehicle sales had boosted demand in companies along the supply chain.

While deal activity might pick up as early as the first quarter of 2023, the scale of revival could be limited by how quickly venture capitalists could raise funds, said Tay Choon Chong, managing partner at Vertex Ventures China. Many funds had not accumulated a lot of money this year, he pointed out.

"There will be investment demand in the market, but many venture funds are yet to get their capital ready, so deal activity may not recover very quickly," he said.

Preqin figures show that yuan-denominated funding into venture capital firms this year is on track to be lower than for any year in data going back to 2012.

($1 = 6.9603 Chinese yuan renminbi)

Source: Reuters

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