A new study by Thomson Reuters reveals that in Q1 2012, venture capital in Chinese tech companies fell by 84 percent compared to Q1 2011. The new data released on Monday shows that venture capital firms invested only $138.5 million in Chinese Internet companies versus $866.5 million in the same timeframe last year.

Reuters cites a "slew of accounting scandals, and fears that the corporate structures used by China's Internet firms could face greater scrutiny from Chinese authorities" which have spooked US investors in the past year. The report adds that these issues have slowed the rate of taking Chinese companies public. With fewer IPOs, there is less willingness to invest venture capital money.

China, of course, has the largest number of Internet users of any single country in the world, at just under 500 million. It has some of the fastest growing tech companies anywhere, including search engine Baidu and social network RenRen, which are listed on the NASDAQ and New York Stock Exchange, respectively.

Still, American VC firms continue to invest in the country—SAIF Partners, a private equity firm, just last week dropped in a cool $20 million to Chinese mobile gaming startup D.CN, which helped launch Angry Birds in China. Similarly, last month, Fidelity Investments said it would be launching a new China VC fund worth at least $250 million, with half of that fund going towards the consumer and information technology sectors.

However, a recent blog post by Peter Fuhrman, chairman of China First Capital, Ltd., a "boutique international investment bank and advisory firm," cited the numerous challenges that Chinese entrepreneurs face.

"Taxes are numerous and high," he wrote. "Regulations can be as stifling as anywhere else in the world. Laws change frequently. Worker salaries are now growing by 25 percent a year or more. Every good business idea, almost within minutes, attracts hundreds, if not thousands, of competitors. Success or failure can be conferred at the whim of a local bureaucrat. And still, the great entrepreneurs of China keep marching forward, in ever greater numbers."