As tensions between Washington and Beijing intensify, Chinese startups are becoming less dependent on overseas venture capital and are increasingly turning to financing from local governments. During the first eight months of this year, they raised USD 6.6 billion from abroad, representing over 10% of total funding, a sharp drop from roughly 50% in all of 2018, according to financial data provider Shanghai DZH.
Z.ai (formerly Zhipu AI), a Chinese artificial intelligence company founded as a spinoff from Tsinghua University, is preparing for an IPO. Its shareholders include funds backed by municipal governments in Beijing and Shanghai, as well as leading Chinese information technology companies such as Alibaba Group. China International Capital Corporation, an investment bank partially owned by the Chinese government, will serve as the lead manager for the IPO, symbolizing the country’s efforts to support promising early-stage businesses in achieving technological innovations.
The US added Z.ai to its list of foreign entities subject to export restrictions in January, citing its contributions to the modernization of the Chinese military. The designation is expected to make it difficult for the company to procure advanced computer chips from US suppliers. If it successfully goes public under these circumstances, the IPO would mark a significant step forward for Beijing in its efforts to curb reliance on the US.
“Beijing is strengthening its presence in the startup ecosystem in China,” said Naotaka Sonoda, senior economist at PwC. In the January-March quarter this year, government-affiliated investment companies took part in roughly 16% of funding rounds, up from less than 5% a decade earlier, according to data from US research company PitchBook.
Chinese startups primarily raise capital in two ways: by receiving investment in USD or other foreign currencies from overseas venture capital companies, or by collecting funding in RMB from domestic investors. Shanghai DZH’s data shows that most of the funds raised in the January-August period were denominated in the local currency. The dollar’s share hit about 50% in the late 2010s and has fallen since. After peaking in 2021, total fundraising has been declining as well, largely due to reduced USD-denominated investment.
The Chinese leadership, headed by President Xi Jinping, began tightening its control over the high-tech sector around 2020, prompting overseas venture capital providers to become more cautious about investing in China. When the US Congress subsequently raised national security concerns about US venture capital investment in China, some investors were compelled to spin off their Chinese operations. Facing growing obstacles in securing foreign funding, Chinese startups have increasingly relied on local government-affiliated funds to fill the gap.
This shift in funding sources is already reshaping the sector. In 2024, startups in fields such as pharmaceuticals, semiconductors, basic materials, and AI—areas prioritized under the national strategy—secured more capital than those in other industries. Before long, there could be more “national policy” unicorns—unlisted companies valued at USD 1 billion or more—like Z.ai.
The contraction of foreign capital to startups, coupled with their growing reliance on government funding, could significantly influence the ongoing competition for technological supremacy between the US and China. The US retains a financial edge, attracting investment from around the world. AI investment from the private sector in the US is more than ten times that of China. Yet US restrictions have at times spurred innovation in China, as illustrated by the case of Chinese AI research company DeepSeek.
“Innovation doesn’t stop [in China],” said Bill Gurley, a renowned Silicon Valley venture capitalist, after his recent visit to China, expressing surprise at the extent of entrepreneurial enthusiasm in robotics and AI.
There was once a strong interdependence between Western investors and Chinese corporate recipients, as investors provided capital and talent in exchange for high returns. However, amid deteriorating relations between Washington and Beijing, it is becoming increasingly difficult for these investors to reap the benefits of their investments, including opportunities to learn from technologies developed in China. As economic ties weaken, the confrontation between the two countries becomes harder to contain, perpetuating the vicious cycle.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.