For many years, China has been seen as an economic powerhouse with a special emphasis on the country’s suitability for entrepreneurs and young businesses.
China was an excellent location for startups, providing access to a large market, a big pool of skilled employees and governmental regulations that were favourable for new businesses.
However, the situation has changed China was one of the up-and-coming startup capitals of the world.
What Made China a Great Place for Startups?
It would be impossible to narrow it down exhaustively, but there seem to be three main reasons why China was such a powerhouse in terms of being a great location for startups.
First, China is known for its very large population – about 1.5 billion people in 2022. This means that with such a large domestic market, fledgling companies were able to grow and operate successfully within China for quite a while before necessary expansion required them to go global.
Second, while the Chinese economy was historically focused on manufacturing, its shift into the world of technology resulted in great success as it was able to contribute significantly in a growing economy with a great deal of potential. A big reason for this move came down to government policies.
Finally, the economic and investment relationship between China and the USA used to be incredibly strong, with a great deal of Chinese foreign investment coming from America. In particular, Chinese startups and successful unicorns such as ByteDance received massive amounts of capital from US-based venture capitalists, becoming a significant reason as to why the economy was on the rise.
And, while the USA was China’s biggest foreign investor, it wasn’t the only country pumping money into the largest economy in Asia over the last two decades, and here’s why:
- During this period, there was quite a lot of available investment funds, so much so that in many countries (especially the USA), available investment funds seemed to outnumber local investment ideas. Thus, VCs turned to emerging and developing markets and at the time, China was on the rise, and as a result, received loads of foreign capital.
- The Chinese government placed a great deal of emphasis on investing on infrastructure which is always a positive contributor to investment locations for startups. It made the country attractive in terms of the implication that the Chinese economy was growing and becoming more sophisticated.
- There was, and always has been a massive workforce in China, and not only that, but an increasingly skilled and tech-savvy workforce, which is positive for investors.
- Government regulation favoured investment in commercial and entrepreneurial ventures and it encouraged this by providing some really significant financial incentives, including tax breaks, grants, loans, subsidies and more.
- Over the last two decades, the Chinese political system has been fairly stable. Of course, this wasn’t necessarily due to democratic policies that aligned with the values of the US (and other Western countries), but it did keep the economy relatively stable.
- China was known for its export-friendly policies and international free trade agreements, two major reasons why foreign investors were keen to pump money into Chinese-based businesses – they could easily operate and do business with foreign partners which is important for trade as well as development and growth.
Overall, during this period, China was a great place for startups. The economic environment was ideal for starting and growing businesses, as well as attracting foreign investment and ultimately going global.
However, this is no longer the case.
Foreign Investment in Chinese Startups is Falling
China went from having one of the most successful and quickly developing economies in the world to losing foreign investors and becoming a significantly less attractive place to launch and grow a business.
So, what happened?
Well, the first two major and most obvious reasons are the Covid-19 pandemic and the relationship between China and the US beginning to sour.
While the whole world was negatively influenced by the devastating consequences of the Covid-19 pandemic, China has found it significantly more difficult to bounce back. The economy was hit incredibly hard during the various lockdowns over a nearly two-year period, and it simply hasn’t been able to regain economic stability.
And unfortunately, economic stability is a deal breaker for foreign investors.
Indeed, China’s GDP has turned a corner, and not in a good way. After many years of annual growth, China’s GDP has now been consistently declining since 2020, and predictions from the World Bank have projected this to not only continue but get worse until at least 2026.
As always, politics plays a massive part in this as well. The Chinese government has always taken a very different approach to the Americans, but the two nations have still managed to align in many ways. However, that no longer seems to be the case, especially in the wake of the Chinese government cracking down on several industries in recent years.
Various policies and regulations have been put in place to ensure that businesses and industries adhere to the official government line on all social and political issues, which has resulted in reasonable concern from not only business owners but more importantly, foreign investors. This has resulted in financial losses, for one, but ultimately, it’s led to a loss of faith in the long-term potential of China’s economy.
Although it’s impossible to say what the future holds for the Chinese economy, one thing we do know is that things could change at any time. It wasn’t that long ago that the country was one of the top locations for foreign investment.
A lot would have to change to make China the economic and startup powerhouse that it once was, including a great deal of work from the government in terms of changing regulations and policies, but it’s not impossible.
Foreign investors may be tempted to creep back into investing in Chinese startups if the economy does stabilise and political tensions calm, but for now, it seems like the experts may be right – China has passed the peak of its VC boom.
