The number of China-based technology companies listing on American exchanges was a recent market narrative. You recall the Huya IPO, the Nio deal that we never really got, and Luckin Coffee’s meteoric rise. Heck, don’t forget , , and even (more here, here, and here, respectively).

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Looking back through our coverage is good reminder that a swath of China-based tech and venture-backed shops chose the U.S. markets.

Individually, of course, the debuts have been a varied mix of success and failure. Normal stuff. Today, however, there is a sharp, downward trend to most of the companies in question and the why isn’t good news. :

Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations.

The same report goes on to note that the current American government is also discussing “delisting Chinese companies from U.S. stock exchanges and limiting Americans’ exposure to the Chinese market through government pension funds.” The moves, in aggregate, could put negative pressure on China-based companies listed on American exchanges.

It’s Friday, so I’m going to avoid the usual throat-clearing. This is probably pretty stupid. The Chinese government is anti-democratic, increasingly autocratic, opposed to religious freedom, and is currently erasing an entire culture in Xinjiang. But that doesn’t mean that closing economic ties between our respective capital markets will make those situations any better. Indeed, it probably makes them worse; isolating a rival power isn’t a way to influence its actions if it has access to other markets.

Trade wars were said to be easy to win. Instead, we’re now seeing American investors take hits to their portfolios as the current administration looks to find leverage to summon even a small win.

The moves will limit the listing-pace of China-based companies on U.S. exchanges, making our domestic capital markets more provincial and less global. Meanwhile, the. Consider today, therefore, a coda of sorts on the boom in Chinese tech and venture-backed listings here in the United States.

Viva la self-inflicted wounds.

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There are scores of China-based unicorns, and some of the country’s biggest names are well-known even where their products aren’t popular. Companies like , , , and others. And then there’s, say, , which is owned by a China-based company and apparently gave us Lil Nas X.

Meme-powered rappers aside, if you care about technology and its good bits (change! innovation! the future!) and its bad bits (surveillance! clustering! podcasts!), China has been a key participant, even driver, of the boom that the venture-backed startup world still finds itself in the midst of.

However, that state of affairs is changing somewhat. Let’s see how.

China Falling

As the following chart shows, China’s share of the world’s supergiant rounds—venture rounds of $100 million or more—has fallen from its world-leading position in 2016 to third place today.

Supergiant rounds are the power plays of the unicorn world; by raising nine- and ten-figure rounds, the hottest, and sometimes even the best private technology firms, can avoid going public, operating off-the-radar to some degree while they accrete size. Capital for such companies is a weapon. (Examples include , , and .)

But sometime after seemingly peaking in mid-2018, China went from being the country where the most supergiant rounds were raised to the below state of affairs:

As you can see, the downward trend regarding China’s participation in the supergiant venture space has continued. And now China’s two-quarter moving average (the lines of various color) has dipped to third place.

Losing the supergiant race implies that companies based in China are no longer the most capable at raising late-stage money. This could lead to earlier IPOs from China-based companies or simply slower activity in the Chinese Internet sector; you cannot spend as much as you might want if your next $100 million round might not be there when you need it.

So What

A single country finding itself in third place after the traditional market leader and the rest of the world grouped into a single collective is no sin, of course. As you can tell from the chart, only two countries in the world have had a shot at managing a leading supergiant tally on their own. But for China to fall as far as it has—note that China’s Q2 2019 result is lower than what we’ve seen from the country since what looks like late 2015—likely tells us two things.

First, China’s rise in the rankings of supergiant rounds was is somewhat connected to its macro condition. Trade tariffs continue to impact the country at the direction of the Trump Administration, and it appears that the startup scene (as measured through venture capital) is slowing as well.

We often discuss the impact of tech stocks (good or ill) on investors deploying capital into similar, private companies. That the macro picture would impact the former, and thus either ding or bolster the latter, makes good sense. Venture data concerning China underscores the point.

Second, China isn’t going to take over the entire world of startups in one go. A few years back, if you spoke with VCs, you would hear impressed comments about China-based companies. Long hours (the dreaded “996” model) and a huge market with strong smartphone penetration and fewer hang-ups around privacy seemed to indicate that China was what’s next.

However, that ignored the fact that China’s population is rapidly aging, cost of living is rising (when compared to other emerging economies), and annual economic growth for the country has been steadily declining since 2012.

For all those reasons, China as a startup hub that is capable of supporting cash-burning enterprises seems less certain.

Illustration: . Data: .

The recent Crunchbase News report on the Chinese startup venture capital market detailed a slowdown in the second half of last year, with the fourth quarter posting the country’s lowest reported venture dollar figure in 2018. Compared to the year-ago period, Q4 2018 venture figures in China were down in dollar terms, though deal volume appeared higher.

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On the same theme, a out today details similar venture results from data provider . The article effectively confirms what it calls “[r]umours about tighter hiring practices in China’s tech sector [that] began to swirl at the end of 2018 amid cooling valuations for start-ups [and] a shrinking pool of venture capital funds” by citing the experiences of several workers in the Chinese tech space.

The data and the anecdata don’t look good for the Chinese venture and startup space. And if things got a bit overenthusiastic in the United States over the past few years – recall the boom in supergiant venture rounds – the Chinese market at times seemed to be in a class of its own. The great capital wave that the country saw has led to new, big companies like the ever-expanding Luckin. And anti-successes like the twin misses of and , which failed to live up to their hype.

The question is how much of the Chinese (and American) startup scene needs to unwind, and what portion merely needs to reset and drive more profitable revenue through its books. It’s going to be a lot of each. If the Chinese venture slowdown persists into 2019, the ratio could tip towards shutdowns. It’s simply impossible to tell from here what portion of China-based startups are floating enough cash to get market-ready to raise more, and what portion is not.

Adding to the China technology markets current problems was the of Bing to the country’s tech market. As China’s regime’s firewall determines which websites and services are Sufficiently Safe to be allowed, having Bing lose that imprimatur—given Microsoft’s  into something censors could tolerate—may signal the coming of an even more closed tech space. Surely that would not be a net-positive for China-based tech.

And with some expecting China-US venture activity to come to a standstill, any new bad news is unwelcome in a country with an economy .

Top Image Credit: .

China-US tensions surrounding trade could begin to impact startups in a new, foreboding fashion, one that could trip up investment between the two countries’ technology sectors.

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A “former deputy governor of the People’s Bank of China”  said that “after the [recent] Huawei events, all the Chinese money into Silicon Valley stops. And no U.S. money will want to invest into China either.”

The word “stops” seems to imply a going to zero. Is that a big deal? Should you care? Let’s explore the matter, starting with Huawei itself.

Context

Let’s start with a little context. Huawei’s CFO was arrested in Canada in December 2018. She may be extradited to the United States over “helping Huawei cover up violations of sanctions on Iran.”

The company has been in the news for other reasons lately, including a , and banning or threatening to ban  .

The deepening Huawei rift highlights a growing divide between the Chinese technology sectors and the rest of the world. China is pursuing a controlled Internet, with domestic tech shops at government behest for everything from to . (Here’s from this morning). While the United States technology sector has its own set of problems, they are distinct from it being vassal to its domestic government.

Money

One thing that the technology sectors of both the US and China share is investment, and, broadly, investors. Cross-border venture activity between China and the United States has been a theme in the recent past.

It’s something that Crunchbase News first explored in June 2017, at which point we noted that China-US cross-border venture investing seemed to peak in 2014 and 2015 after growing sharply in the preceding years.

However, 2017 posted a new record when all the data came in, and 2018 saw new records of US investors putting capital into China-based companies. As you can see from this December 2018 chart, the US took on more of the cross-border deal volume over time:

There are two things to take from that data. First, that if cross-border venture activity did precipitously slow, it would not impact the two countries equally. And, if it was to slow, the change would be huge in terms of slowing global deal volume.

The above chart includes a lot of deals. But, as you can see from the changing ratio of the bars, it’s Chinese companies that are picking up more money from US-based investors than the other way around, at least in deal (as opposed to dollar) terms. So, if that goes to zero, as our former Chinese bank official predicts, US-based startups might not land as deep in the soup as the China-based group.

Which could be problematic given that Chinese VC activity fell throughout the second half of 2018. That fact, coupled with , a , , a and more, paint a dreary picture for the Chinese tech sector.

I doubt that deal volume between the US and China will go to zero. But if it does decline, that would be a tremendous change in the global venture landscape. We’ll keep an eye on the data and update our charts in a bit. Time will tell.

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