US-backed funding rounds in China fall to lowest in a decade

The value and volume of US venture capital-backed funding rounds in mainland China companies plunged in 2023, hitting the lowest level since 2013 as US investment restrictions, geopolitical tensions and reshoring policies give investors pause.

"We're definitely seeing trade tensions escalate between the US and China," said Alison Adams, managing principal and research consultant at institutional investment consulting firm Meketa Investment Group.

Funding rounds with involvement of US venture capital totaled $3.93 billion in 2023, down 52% from $8.26 billion 2022. The number of deals fell 46% year over year to 116 from 216. This is the second straight year that transaction value and volume fell on an annual basis, S&P Global Market Intelligence data shows.

Policy impact

Venture funding, which typically targets technology startups, has been impacted by US restrictions on outbound investment in China's technology sector, including specific semiconductors, quantum computing and artificial intelligence technologies, citing national security concerns.

Another factor is the US reshoring initiatives such as the CHIPS Act and the Inflation Reduction Act, which "make investments here in the United States or in NAFTA-aligned (North American Free Trade Agreement) countries like Mexico, Vietnam and even Japan much more attractive," Adams said.

Adams added that the Chinese government's efforts to fund local industries, particularly semiconductor, artificial intelligence, quantum computing, biotechnology and green technology, dissuade investors, especially those based in the US, from investing in China.

Investment shops previously focused on China such as Sequoia Capital Operations LLC, which spun off its China arm into an independent unit now known as HongShan, have taken steps to reposition investment strategies as Asian or global investment firms, "responding to intensifying pressure from investors," Nikkei reported.

This year, US venture investment is on track for a steeper plunge. Funding rounds amounted to $280 million across 21 transactions in the first quarter.

* Download spreadsheet with data featured in this story. * Read about global private equity investment in Asia-Pacific, excluding Japan. * Read about private equity dealmaking in the global cybersecurity sector.

Biggest deals

Apparel company Nanjing Xiyin E-Commerce Co. Ltd.'s $2.00 billion funding round was the top deal, and the lone transaction that breached the billion-dollar mark, among investments with involvement from US-based venture capital investor in 2023. General Atlantic Service Co. LP participated in the round along with HongShan, Mamoura Diversified Global Holding PJSC, Mubadala Technology and Tiger Global Management LLC.

Companies in the consumer sector pulled in the highest amount of transaction value, securing $2.14 billion, or 54% of the total US venture capital-backed funding rounds in 2023. The healthcare sector was second with funding rounds aggregating to $1.06 billion, or 27% of the total. The technology, media and telecommunications sector, which comprised 40% of the total in 2022, raised roughly 17% of the 2023 total or $652.7 million.