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In international trade, the whole world’s a stage. And all the drama between the U.S. and China stole the show as the curtain fell on 2018.

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What started as a tiff over tariffs and intellectual property grew into a full-fledged trade war between the world’s largest economies. The outcome: at least six months of uncertainty and hundreds of billions of dollars in preemptive and retaliatory tariffs levied between the two countries. The U.S. and China have reached a tentative truce, for now, but the broader economic impact of the trade war will likely reverberate for several quarters to come.

Apparently, however, nobody told this to venture capital investors. (Or, if they have, it’s slow to sink in.) Cross-border VC investment activity between the U.S. and China is at an all-time high.

In the chart below, we’ve plotted cross-border transaction activity between companies and investors on opposite sides of the Pacific Ocean.1

Venture capital deal data in Crunchbase indicates that the balance of trade (such as it is) between the U.S. and China-based venture investing markets is shifting. For 2018, we’ve surfaced 355 deals between U.S.-based investors and China-based companies and 198 deals between China-based investors and U.S. companies2. U.S. investors accounted for over 64 percent of the cross-border investment deal volume in 2018 to date. That’s a near perfect reversal from 2016, when China-based investors accounted for 63 percent of cross-border VC investments between entities in the U.S. and China.

(Venture) Capital Over Conflict

It’s possible that venture investors put politics aside in the interest of making (or at least trying to make) gobs of money. As the global venture market soared into record territory in 2018, so too did cross-border investments between the U.S. and China.

In the chart below, we plot the same counts of cross-border rounds on a more granular, quarterly timescale. We used a two-quarter moving average to smooth out some of the noise.

We can see a notable uptick in U.S. investor participation in China-based company rounds, peaking in Q2 of this year, one of the biggest quarters on record for venture market growth.

The 2018 jump in U.S. investment in China is loosely correlated to the trend of companies raising $100 million or more in single rounds of venture funding. This means that U.S. investors are taking part in more, larger rounds raised by China-based companies, exposing American firms to high-growth companies offshore. These “supergiant” rounds of venture funding, by definition, require a tremendous amount of capital to fill out, and that could be part of what’s prompting an acceleration in cross-border activity today. At least through August, when we compared the two markets, the U.S. and China were neck-and-neck in their output of venture deals totalling $100M or more.

Companies wanting global scale seek capital from global sources. The U.S. is a valuable market (and home to a still-robust IPO climate), so it’s likely China-based companies see U.S. investors as a conduit to either new customers, public market liquidity, or a bit of both. In turn, U.S. investors buy in to companies experiencing hyper-growth at a pace and scale less common in the American market.

Shaky Ground Likely Lies Ahead

The current trade spat between the U.S. and China is perhaps the most acute example of a long-term political and economic struggle between two superpowers. China-based investor involvement in U.S. company rounds may have dipped a bit since mid-2017, when the U.S. government began mulling limits to Chinese tech investment in strategically-important technologies to the U.S.

But the declines are small and seed and early-stage deals are subject to some reporting delays, so it’s also possible that declines in China-U.S. VC investment are smaller than reported here.

For now, the two nations have reached a trade detente negotiated by China’s President Xi Jinping and U.S. President Donald Trump over a (well-done) steak dinner at the G20 meeting in early December. But given the increasingly mercurial nature of U.S. executive branch leadership, detention of a Chinese executive in Canada (based on sanctions fraud charges faced in the U.S.), seemingly retaliatory detention of two Canadian executives in China, and rising market volatility at home and abroad, there are many factors which threaten to destabilize the situation once again.

In other words, the trade war may yet get worse before it gets better for good. But it’s evidently going to take a lot more than the current sanctions regime to break the newly-formed trans-Pacific ties between investors and founders.

Illustration: Li-Anne Dias