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It will take a lot more to win back their broken hearts 

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China’s leader, Xi Jinping, worries about “black swans” (unexpected crises) and “grey rhinos” (big problems that are ignored). Recently he has been fretting about vanishing unicorns, too. In May he asked a group of bosses to explain why fewer Chinese startups were turning into these beasts: privately held startups with a valuation of a billion dollars or more. In June the State Council, China’s cabinet, acknowledged that investors were fearful of putting money into risky new ventures and that it was difficult to cash out.

Reviving China’s flagging entrepreneurial spirits has become urgent. As this article was published, the Communist Party’s Central Committee ended a four-day meeting in Beijing. The meeting decided to “place reform in a more prominent position”. During the event new data added to gloom, showing that gdp growth in the second quarter of 2024 slowed to 4.7% year-on-year. Successful startups could boost growth and technological self-sufficiency, which are key party aims.

China used to breed many unicorns. Between 2016 and 2018 the country created at least as many as America and three times more than the rest of the world. But so far this year China has produced only half as many new billion-dollar startups as America. The total in 2024 is likely to be less than one-third of the number in 2021, when China begat a record 109 unicorns. A global slowdown in startup activity is only partly to blame.

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In 2020 Mr Xi began worrying about a “disorderly expansion of capital” as tech giants moved into businesses over which the state wanted tight control. Regulators lashed out, alarming entrepreneurs and investors. In 2021 China forced Didi, a ride-hailing app, to delist in America over data-sharing concerns. Offshore listings have become frowned upon, while domestic ones have dried up. The value of onshore initial public offerings (ipos) fell by 84% in the first half of 2024 compared with the same period last year. One reason is that regulators curbed them in an effort to buoy China’s sagging stockmarkets.

The environment has become so forbidding that some firms are switching nationality. Joshua Xu is the kind of ambitious entrepreneur that Mr Xi will need to encourage. Four years ago Mr Xu founded HeyGen, an artificial-intelligence startup in China. In 2022, however, he moved the firm to Los Angeles to get easier access to capital and advanced computer chips. Last month, during its latest funding round, HeyGen’s worth shot up to $500m. That means it is halfway to becoming a unicorn, but an American one. Hundreds of other startups have moved abroad.

The Chinese government may now see the error of its ways. Mr Xi and the prime minister, Li Qiang, have been meeting entrepreneurs, urging them to invest and innovate. But reviving the unicorn scene is not straightforward. The original boom depended on American investment funds, often staffed by executives with Chinese roots. Seven in every ten Chinese unicorns have foreign, mainly American, backing. A single firm, HongShan, had a hand in 96 of 369 Chinese unicorns, according to kpmg, an accountancy firm. HongShan was part of Sequoia Capital, a renowned Silicon Valley venture capital (vc) firm, until it split off in 2023 as tensions rose between China and America.

Attracting Silicon Valley cash is much harder now. American funds investing in China face greater scrutiny and policy uncertainty. For example, draft rules published on June 21st by the treasury department ban some investments in Chinese artificial intelligence, expanding America’s security net to include outbound capital flows. Reflecting these risks, this year foreign investors are on track to fund fewer Chinese startups than in any other of the past ten years. Data from avcj, a research firm, suggest they have provided only one-fifth of vc funding in 2024, down from two-thirds between 2014 and 2021.

Chart: The Economist

As a substitute the government wants to replace foreign cash with more of its own, through state-backed vehicles known as guidance funds that invest directly and back other vc firms. In last month’s State Council directive, the government promised to make it easier for Chinese firms to list at home, and abroad too, if they are not in sensitive industries. The change of tone has had some effect: within days of the pivot in June a handful of ipo applications in mainland China were accepted. Yet the state’s growing role in filling the gap left by the exit of foreign capital is amplifying a different set of fears.

Mr Xi favours “new productive forces” (party-speak for favoured cutting-edge tech industries) which may distort the allocation of venture capital. “Our job all day,” says one fund manager in Beijing, “is to figure out where the government is going to be investing and bet on it.” And investors who lose money, as vcs often do, risk graft charges when using state funds. Li Bo of Peking University and fellow academics write that some fund managers are willing to forgo millions of dollars in government money rather than involve the state.

Entrepreneurs remain pessimistic. Even within the bureaucracy there are misgivings. In a blog last month a government researcher in Beijing outlined the tensions inherent in China’s stance on startups. Officials must balance a push for self-reliance with the need to stay open to foreign capital, and enforce tough regulatory controls while maintaining business confidence. The government has woken up to the scale of the problem, but the fix for how to reconcile its contradictory goals is proving as elusive as one-horned beasts.■

Subscribers can sign up to Drum Tower, our new weekly newsletter, to understand what the world makes of China—and what China makes of the world.

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This article appeared in the China section of the print edition under the headline “Love-bombing entrepreneurs”

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China

July 20th 2024

• →Xi Jinping is trying to love-bomb China’s entrepreneurs
• →Fury erupts in China over a food-safety scandal
• →The No.1 reason for success in China? Connections
• →A spectre looms over Hong Kong’s property market
• →When party propaganda falls flat

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From the July 20th 2024 edition

.css-exdolm{color:var(–mb-colour-greyscale-london-5);font-size:var(–mb-typestyle-body-1-size);font-variant:var(–mb-typestyle-body-1-figures);font-weight:var(–mb-font-weight-regular);line-height:var(–mb-typestyle-body-1-leading);margin-bottom:1.5rem;}

Discover stories from this section and more in the list of contents

⇒Explore the edition.css-v7aorn{margin-top:0.875rem;}.css-v7aorn +.eq1asik0{margin-top:3rem;padding-bottom:0;}.el1rg701+.css-v7aorn{margin-top:0;}.css-9ejc71{position:relative;border-bottom:0;border-top:0.0625rem solid var(–mb-colour-greyscale-london-85);color:var(–mb-colour-greyscale-london-35);}.css-9ejc71 .ebxshaw0{margin-top:0;}.css-9ejc71 >.e5z0ibw0>*{padding:var(–mb-spacing-md) 0;}.css-9ejc71 >.e5z0ibw0>*:nth-of-type(2){border-top:0.0625rem solid var(–mb-colour-greyscale-london-85);}@media (min-width: 37.5rem){.css-9ejc71 >.e5z0ibw0>*:nth-of-type(2){border-top:0;}}.css-9ejc71 >.e5z0ibw0 .e5z0ibw0{gap:var(–mb-spacing-sm);}.css-yb4x8x{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-flex-direction:column;-ms-flex-direction:column;flex-direction:column;-webkit-align-items:stretch;-webkit-box-align:stretch;-ms-flex-align:stretch;align-items:stretch;-webkit-box-pack:start;-ms-flex-pack:start;-webkit-justify-content:flex-start;justify-content:flex-start;}@media (min-width: 37.5rem){.css-yb4x8x{-webkit-flex-direction:row;-ms-flex-direction:row;flex-direction:row;}}@media (min-width: 37.5rem){.css-yb4x8x{-webkit-align-items:center;-webkit-box-align:center;-ms-flex-align:center;align-items:center;}}@media (min-width: 37.5rem){.css-yb4x8x{-webkit-box-pack:end;-ms-flex-pack:end;-webkit-justify-content:flex-end;justify-content:flex-end;}}.css-1j1j36d{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-box-flex-wrap:wrap;-webkit-flex-wrap:wrap;-ms-flex-wrap:wrap;flex-wrap:wrap;row-gap:0.6rem;-webkit-column-gap:var(–mb-spacing-sm);column-gap:var(–mb-spacing-sm);}ShareReuse this content.css-169lzn0{position:relative;-webkit-align-self:auto;-ms-flex-item-align:auto;align-self:auto;display:none;}@media (min-width: 80rem){.css-169lzn0{grid-column-start:9;}}@media (min-width: 89rem){.css-169lzn0{grid-column-start:13;}}@media (min-width: 80rem){.css-169lzn0{grid-column-end:13;}}@media (min-width: 89rem){.css-169lzn0{grid-column-end:17;}}@media (min-width: 80rem){.css-169lzn0{grid-row-start:1;}}@media (min-width: 80rem){.css-169lzn0{grid-row-end:span 4;}}@media (min-width: 80rem){.css-169lzn0{display:block;}}.css-169lzn0:last-child::after{height:0;}.css-1y1zooy{display:inline;}.css-1y1zooy >*+*{margin-top:2rem;}.css-1y1zooy >*:only-child{margin-top:1.25rem;}.css-1y1zooy >*:last-child{position:-webkit-sticky;position:sticky;top:1.5rem;}.css-mqgbir{margin-top:6rem;}.css-mqgbir .ds-section-headline{margin-bottom:1rem;}

More from China

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Chinese authorities try to stop parents gaming the exam system (again)

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They will go to great lengths to try

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China’s alarming sex imbalance

By 2027 one in six young Chinese men won’t be able to find a partner

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Behind DeepSeek lies a dazzling Chinese university

It models itself on Stanford, and is in the tech hotspot of Hangzhou

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Panama symbolises the Sino-American struggle for influence

The superpowers use soft and hard power

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Tensions with the West are fuelling China’s anxiety about food supplies

Grain pains are growing

Hail China’s new “ice-and-snow economy”

The country is betting on winter sports and tourism to boost growth in its rustbelt

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Источник: www.economist.com