The past two years, however, has been challenging for the world's second-largest economy, following the disruptions caused by the coronavirus pandemic, a sweeping regulatory crackdown on Big Tech firms and more recently, Beijing's strict implementation of its zero-Covid-19 policy to counter the latest outbreak in the country.
These have all put a strain on economic activity, which has resulted in venture capitalists biding their time on investments in the country, according to interviews with several private equity investors and market analysts.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
"Investors are taking a wait-and-see approach and being very cautious about investments in China," said Zhou Hao, head of Greater China private equity practice at management consulting firm Bain & Co, in a recent media briefing. He indicated that tensions in US-China relations and Russia's war with Ukraine also "pose as a great challenge to the global supply chain and China's economy".
"There have been many [government] policy adjustments since the second half of last year, so it is very common that investors - especially overseas investors - are worried about the uncertainty [brought by these changes]," Zhou said.
The "combination of more transmissible [coronavirus] variants and the strict zero-Covid policy could continue to hamper economic activity and increase uncertainty", the IMF said in its latest World Economic Outlook.
The stakes have never been higher for both venture capitalists and Chinese firms, as they try to navigate an uncertain regulatory environment, ongoing geopolitical tensions and slower economic growth.
China's internet companies, which raised funding of more than US$15 billion in the first quarter of 2021, obtained only US$3.5 billion in the same period this year, according to a report published last month by the China Academy of Information and Communications Technology. In the first quarter this year, the number of fundraising deals in the country's internet sector fell 38.3 per cent from a year ago, while fundraising volume plunged 76.7 per cent.
The sharp decline came at a time when the country faced its worst Covid-19 outbreak since the pandemic began about two year ago. China is currently one of the few countries to pursue a stringent zero-Covid-19 policy, while many countries around the world have adapted to living with the virus.
President Xi Jinping has reiterated the government's unwavering commitment to that strategy. Chairing the seven-member Politburo Standing Committee meeting, the highest decision-making body in China, Xi this week pledged to fight any attempt to "distort, question and challenge" the country's policies.
But the day when China eases border restrictions could provide more clarity for investors. "If the border opens up, it would definitely be very helpful for venture capital and cross-border [mergers and acquisitions]," said Jeff Wu, China partner at Silicon Valley-based venture capital firm Pegasus Tech Ventures.
While many venture capitalists carefully study various factors before pulling the trigger on new investments in China, optimism remains the path for others.
"Covid-19 is a very strong factor, but it's not the dominant factor that defines what you invest in," said a Shanghai-based venture capitalist surnamed Yu, who declined to provide her full name and title. "The Chinese market still has great potential over the long term."
Yu asserted that not all companies need to go global. "For certain industries, the China market is already enough to build a listed company," she said.
China still managed to raise US$12.7 billion in venture funding in the first quarter this year, according to a CB insights report in April. That amount was behind the US$71.2 billion raised by the US in the same period, but ahead of the UK's US$9.2 billion haul, the report said. Global venture funding totalled US$143.9 billion across 8,835 deals in the first quarter.
"The world has moved on," said Jenil Sheth, a New York City-based retail investor who holds stocks in Alibaba, Didi Global and Weibo through KraneShares CSI China Internet ETF, known by its ticker name KWEB - an exchange-traded fund that offers US investors exposure to Chinese technology stocks in the secondary market. Alibaba owns the South China Morning Post.
Sheth indicated that the zero-Covid-19 policy, for US investors, "seems impractical and set up for failure".
"Covid-19 is [now considered] just like a mild flu in the US, Europe and most of the world," Sheth said. "We need to see a more liberal Covid-19 containment policy, financial stimulus, lower interest rates, and 'stop' the tech crackdown to see sentiment recover [for the China tech sector]."
The basket of Chinese internet securities Sheth bought through KWEB has been down more than 65 per cent in the past year. The American Depositary Shares (ADS) of Alibaba are down 70 per cent from its peak in late 2020, while those of Didi are now worth around 10 per cent of its peak price last summer. US-listed JD.com, Weibo and Baidu have also seen a significant decrease in their ADS prices.
Whether investors have money to put in the primary market is very much affected by the performance in the secondary market, according to Sophie Yao, managing director at Pegasus Tech Ventures China. "The whole stock market is at a low level, which means investors are losing confidence," Yao said.
It echoed a message delivered at a Politburo meeting hosted by Xi on April 29, in which officials agreed that China will promote the "healthy development" of the internet platform economy.
Retail investor Sheth, however, indicated that investing in China is currently in "a glass half-full" state. He said the government's recent push to address uncertainty in the market "may be too little, too late".
