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There’s something up in China, and it’s not the venture capital market.

When it comes to closing very big VC deals on the order of $100 million or more, what we at Crunchbase News have been calling “supergiant rounds,” China-based startups continued a vertiginous downtrend through the end of Q2 2019, breaking step with their U.S. counterparts while ventures in the rest of the world surge ahead in raising nine and ten-figure VC rounds.

Bloomberg reported that the “value of [venture capital] investments in the country tumbled 77 [percent] to $9.4 billion” in Q2 2019 versus the same time last year.

China’s relative position in the global VC ecosystem is shifting. Out of the tens of billions of VC dollars invested worldwide in Q2 2019, Chinese startups accounted for approximately 15 percent of that, down markedly from the past quarter, and is a fraction of what it was in Q2 last year.

This is a major turnaround from this time last year. Q2 2018 saw some of the biggest VC deals of all time: a $14 billion Series C for Ant Financial, a $1.9 billion venture round for Du Xiaoman Financial, Pinduoduo’s nearly $1.4 billion Series D, and others raised by China-based ventures.

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At the close of Q2 2018, we reported that Chinese startups eclipsed the U.S. in venture backing, netting 47 percent of the total funding reported in that quarter. One year later, with a more complete data set, Chinese startups still accounted for 45 percent of dollar volume in Q2 2018.1

Though Bloomberg’s recent report states that U.S. startups raised slightly more VC funding in 2018, Chinese startups led the way at least through October of that year, according to Crunchbase News analysis from the time. By the end of Q4, China’s startup scene had cooled off significantly.

Slow Growth Trickles Down The Economic Stack

Last weekend, the New York Times reported statements made by Chinese officials, who said that their economy “grew 6.2 percent between April and June compared with a year earlier.”

Such a slowdown is significant. The Times reports that numbers cited by Chinese officials “represented the slowest pace in China since the beginning of modern quarterly record-keeping in 1992.” Furthermore, The Q2 growth number (6.2 percent) is less than the 6.4 percent growth rate reported for Q1, continuing a trend of deceleration.

For context, China’s economy was growing at over 12 percent in 2010, recovering from lows in the mid-6 percent range hit during the 2008-2009 financial crisis. Although many news sites cited the ongoing trade tensions between the U.S. and China as the cause of the decline, China’s economic growth has been slowing for years before the current U.S. administration (the principal belligerent in the tariff tiff) and Chinese leadership (which has responded to U.S. tariffs tit-for-tat with targeted economic sanctions of its own) took power.

For comparison, the U.S. economy grew 3.1 percent in Q1 2019, according to the most recent figures published by the U.S. Bureau of Economic Analysis. In the chart below, we plot annual GDP growth figures, compiled by the World Bank. Quarterly data on Chinese GDP growth was not available because that portion of the National Bureau of Statistics of China’s website did not work at time of writing.

It is important to note that GDP numbers reported by Chinese economic officials are subject to some skepticism. A paper by researchers from the University of Chicago and the Chinese University of Hong Kong presented at the Brookings Institute in early March found that Chinese government officials may have over-stated GDP growth by an average of 1.7 percent between 2008 and 2016, “nearly a seventh smaller than reported,” according to an Economist headline at the time. Though this is just the latest analysis, the veracity of China’s reported economic data has been a subject of academic inquiry for decades. The St. Louis Federal Reserve published guidance on alternative methods for tracking China’s GDP in September 2017.

Driving The Declines

Economic slowdowns discourage deployment of risk capital.

It is a well-documented trend in the United States, and not just during the largely tech-focused Dot Com collapse. The 2008-2009 financial crisis also caused a slump in venture backing. Covering the latest PWC-NVCA and Dow Jones Venture Source reports on the U.S. VC industry back in Q1 2009, Sarah Lacy wrote in TechCrunch that venture funding fell by 50 percent between Q1 2008 and Q1 2009.

A student from Erasmus University Rotterdam documented a “highly significant” decline in the number of syndicate partners in venture capital rounds following the financial crisis.2 Translation: tough times bring fewer party rounds. Their supervising PhD, Geertjan de Vries, co-authored a paper which described a number of VC trends catalyzed by the great financial crisis: declines in deal volume and size across the board, with variance across sector, stage, and geography. This created a funding gap for a generation of startups.

What was true in the U.S. a decade ago might bear itself out in China today.

The effects of economic downturns on the Chinese VC market aren’t as well-documented, in no small part because China’s economy has basically gone up and to the right for decades; it was just a question of how quickly. GDP growth stagnated around 2015, but its GDP hasn’t not grown in decades.

Whether it’s trade tensions or the weight of government and corporate debt that’s pressing down on the VC market in China is difficult to tell from the outside. One thing’s for sure though: despite being a unique market in so many ways, China’s startups are subject to the same financial physics as ventures everywhere else.

Illustration: Li-Anne Dias