PE and VC fund managers deserve sympathy at this time, having raised so much money recently only to be blindsided by Chinese policy shifts, as this Reuters article points out. But to continue throwing good money after bad is unconscionable. It would be far better to wait, watch and learn from what is going on at the moment in both Washington and Beijing.
Investing at this level in China has become next to impossible, if for no other reason than public exit strategies are likely to be held hostage by either or both of the US and Chinese governments as their trade war morphs into a financial war. Nevertheless, three strategies seem to have emerged as the consensus: 1) Invest in the government’s priorities; 2) Invest in domestic-focused firms; and 3) Brush up on Xi Jinping Thought.
Each begs rebuttal: 1) Investing in the Chinese government’s priorities is akin to investing in future victims of the US-China conflict; 2) Investing in domestic-focused firms is no assurance of avoiding US Entity Lists; and 3) Xi Jinping Thought is mass-market propaganda that is useless to read in isolation from the broader context of Chinese history.
Now is the time to keep the powder dry. There is further carnage ahead, believe it. This is especially for funds investing in the GBA from their offshore base in Hong Kong.
Indeed, it is tempting to look at the relatively dynamic private companies that have emerged here, far from the emperor’s gaze, and think that they offer better shelter from the current regulatory storm. But this would be to underestimate the determination of the central government to rein in other potential centers of power, as it has done so effectively recently with the region’s premier Internet company, Tencent.
Moreover, it would be to underestimate the power of the US to raise the stakes significantly in its regulatory struggle with China.
As this Bloomberg article points out, not only will US President Joe Biden keep the tariffs of his predecessor in place, but he says he is still working on his China strategy. What are the chances he will make it even tougher for Chinese imports? To be sure, the American business groups lobbying for their removal are, as the story says, out of touch with popular sentiment in the US. No American politician can expect to hold office by going soft on China in the foreseeable future.
And what about the Entity List – could that be widened? Investors who assume Huawei’s downfall won’t be the fate of Xiaomi and others are underestimating the resolve of Biden’s China team. Why would they keep sanctions in place against China’s biggest maker of telecom gear and its once-biggest smartphone maker, and not extend the same treatment to the company that appears to have, one, absorbed Huawei’s losses in smartphone sales and, two, become China’s leading producer of IoT devices?
The same could probably be said for Oppo and Vivo, the country’s two other smartphone giants, based in the GBA’s Dongguan. What would they do without the ability to access the chip technology that is being withheld from Huawei?
For VCs and PE funds, these are questions that must be considered in their quest for the next big thing in Chinese tech.