Chinese stocks tech companies are selling domestically and abroad this week as the country’s ties to Russia add to investor uncertainty at the expense of China’s tech industry. China is also dealing with a COVID-19 outbreak, leading to massive shutdowns at tech hubs, and some of its leading tech companies are trying to bring their listings back to inland shores amid regulatory pressures.
The magnitude of the recent depreciation of Chinese stocks has been dubbed “panic selling” and “ruthless” for context. In numerical terms, the Hong Kong Hang Seng Index fell more than 5.7% today, reaching a new 52-week low; the Shanghai Composite fell 5%, also a 52-week low.
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Analyzing the public market carnage this morning, you might expect Chinese venture capitalists to pull back on their investment pace. After all, when the market’s risk tolerance flips, we often see more conservative behavior from money managers, don’t we?
A major surprise in 2021 was the fact that, despite a regulatory barrage from the central government, Chinese startups had a pretty good year when it came to raising capital. You’d be forgiven for expecting the opposite. After all, the magnitude of the crackdown on 2021-era Chinese tech companies was one of the most significant tech stories last year, leading to a massive reshuffle of not only economic power in the country, but also where private capital flowed.
Of course, we’re curious to see if China’s recent sell-off will have the kind of impact on private market investment we expected last year, even though our confidence to read the country’s economic future is low. Let’s dive into recent data and see what we can discover.
If we followed a few days of declines in the public markets and then wondered what impact the market movement had on historic venture investments, we would be sounding a bit stupid; short-term movements in the public market do not affect the lagging results in the private market. But the recent declines in Chinese stocks are more of a continuation than a new move, so we can look at the Q1 venture capital data and compare and contrast a bit.
At its historic decline, the NASDAQ Golden Dragon China Index tracks the value of US-listed companies with a “majority” of their operations “within the People’s Republic of China.” And oh boy is it a hot mess. I’ve never seen a chart like this:
You can see a clear trend from early 2021 to today, including the recent sell-off that has caused so much commotion.
Adding together our data so far, Chinese stocks are taking a beating as geopolitical, regulatory and pandemic uncertainty has sent investors racing toward exits. What’s more, the valuation declines we’re discussing are not a new phenomenon, but can instead be seen as an acceleration of past trends (see chart above).
So are we finally seeing a slowdown in the pace of Chinese venture capital?