China-US Venture Activity Could Slip Over Huawei Tensions

Morning Markets: Recent comments from a former People’s Bank of China official indicate that China-US venture activity is about to hit a wall.

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” quoted by CNBC 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 what CNN describes as “helping Huawei cover up violations of sanctions on Iran.”

The company has been in the news for other reasons lately, including a spying case in Poland, and various countries banning or threatening to ban its telecom hardware over security concerns.

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 game approvals to content censorship. (Here’s a flavor of the latter 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 trade issues, a slowing economy, yet-rising debt, a weak stock market 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.

Top Image Credit: Li-Anne Dias.