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China’s Economic Slowdown Could Impact Startups

Morning Markets: Welcome to the new year. Get ready to worry about China for all of it.

Apple made news yesterday reporting that its recent performance will fail to meet its prior expectations. The company’s public letter caused its shares to sharply drop. Those declines have continued today, helping to sink American indices.

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It’s not a great day for any company with exposure to China, I’d hazard. But there’s more than just the high-level economic figures, and the companies impacted by macro trends that we should highlight. So let’s look quickly at what the big fears are, and then what we have learned recently about China-based startups, which have their own set of worries.

High Level

The Apple story is not the first indicating that China’s economy is slowing and that the country’s issues could impact the global economy. What Apple brought to the table was definable impact, mostly due to media and audience familiarity with Apple and its most-obvious benchmarks—market cap, status among the world’s most valuable companies, and the current popularity of the iPhone.

There’s a lot more going on, however. Here are a few recent notes from media about China that are worth tying into the Apple story.

We’ll start with the Chinese economy as a whole. Recent economic data indicates that Chinese manufacturing is contracting, a key bearish signal for the country. But as the Sydney Morning Herald notes, “[e]ven before this week’s developments it had been increasingly evident that China’s economic growth rate was been [sic] steadily declining.” Trade wars, as it turns out, aren’t easy to win for anyone.

Turning to the individual, earlier today the Wall Street Journal reported that Chinese consumer spending is down. The Journal noted that China’s economic scale means that when its members spend less, the impact is felt both at home and “across the globe.” The reason this particular piece concerning Chinese economic data resonates is that it points out that traditional commerce and e-commerce are susceptible to the slowdown.

China-based e-commerce giant Alibaba, to pick an example, is a key investor in the country’s startup scene. If it decides to clip spending as economic drag slows its own growth, startups in the area could suffer from decreased investment.

So, Apple says that its China sales fell, but more broadly Chinese manufacturing is slipping, external forces are weighing the country down, and its consumer population is pulling back.

Now let’s turn to tech.

Just Tech

There are optimistic signs in the Chinese startup scene if you want to look for them. Just today Lightspeed raised a $560 million fund to invest in China. TechCrunch notes that the new capital pool is Lightspeed’s “largest-ever fund for China.”

But that’s almost the exception instead of the norm. A recent Wall Street Journal piece notes that Chinese venture capital funds are raising less in recent quarters than before, and that share prices of some high-profile and recent IPOs are in trouble. That combination may squeeze startups twice: first by crimping their access to capital, and then by limiting their exit potential and potential exit valuation.

Continuing on, the following headline from the South China Morning Post I think does a good job painting the story that China-based tech companies are telling themselves: “Baidu CEO warns that ‘winter is coming’ amid slowing growth, economic restructuring.”

And finally, the Apple news is hitting Chinese companies at home. As CNBC notes, following Apple’s letter to investors, “China’s overall tech sector fell slightly and shares of some Apple suppliers dove during Thursday’s mid-morning Asian trading.”

That’s probably enough for you to go on for now, at least in terms of context. What I’d recommend is that we all follow a few more news sources focused on China on Twitter. You don’t want to fall behind.

Top Image Credit: Li-Anne Dias.

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