In the weekly column we take turns writing about innovation and economic trends in Asia.
(Photo: Klawe Rzeczy)
Full of malice, Beijing’s propaganda press uses the bankruptcy of the Silicon Valley Bank (SVB) and the deep fall of Credit Suisse for a verbal broadside against Western financial capitalism. The “looming banking crisis in the USA and Europe” and the highly controversial crisis management had “shaken the confidence of international investors in the western financial system,” writes the “Global Times”, mouthpiece of the Communist Party, gloating.
In the midst of the Western banking crisis, international capital is “probably looking for a ‘safe haven’ in China,” the story continues. With the latter, however, the wish is more likely to be the father of the thought. After the initial post-corona euphoria, capital inflows from international financial investors quickly subsided.
Global investors have become cautious in the face of political and economic risks in the People’s Republic. In addition, interest rate hikes in the US are making investments in China less attractive.
Not surprisingly, China’s central bank officials are quick to point to the “dangerous impact” on financial stability of rapid monetary policy changes in developed countries. Not a word that the shock waves from the banking quake in Silicon Valley have long since reached China.
It is true that China’s traditional banks are unlikely to be affected as they do a large part of their business on the domestic market. But the Chinese start-up scene felt the SVB bankruptcy painfully. The Chinese banking system has a “pawn shop mentality”, criticized the well-known entrepreneur and longtime Alibaba boss Jack Ma. That’s why it was extremely difficult for young companies to get money for growth.
The SVB, which was active in China in a joint venture with the Shanghai Pudong Development Bank (SPD), filled this gap. It brought together yield-seeking venture capitalists from the US with capital-hungry start-ups from China.
Its former CEO, Ken Wilcox, recalls the early years: In 2004, SVB organized a six-day trip to China for Silicon Valley’s best-known venture capital firms with more than $50 billion in assets under management, connecting them with local tech companies. “In Silicon Valley, this trip became a legend,” quotes “The Wire China” from a preprint of his book.
Creative ways of financing Chinese start-ups
Apparently, creative ways were sometimes used to circumvent the strict state requirements for foreign investments in Chinese technology companies – for example via a mailbox in the tax haven of the Cayman Islands.
Most recently, the SPD Silicon Valley Bank (SSVB) had assets of more than two billion US dollars and had more than 2,000 customers in China. Among them are many well-known, young Chinese tech companies such as delivery platform Meituan, surveillance specialist Sensetime and bike-sharing company Mobike. The supervisors quickly emphasized that the business was independent and continued. It is considered likely that the partner bank SPD will take over the SVB share.
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However, it is questionable whether the future owner will dare to use the investment rules in a similarly flexible manner. Especially since the Chinese government has announced that it will take tougher action in the financial sector. The China skepticism of foreign financiers is growing in view of increasing political interventions in the People’s Republic. The so-called rectification campaign in the tech sector has also left its mark on foreign investors.
While in 2021 more than a third of all investments in Chinese start-ups were in dollars, the proportion fell to less than a fifth in 2022, as the “Financial Times” recently reported. Even big venture capitalists like Sequoia are increasingly pulling out of investments in Chinese tech companies due to growing national security concerns in the US.
The bankruptcy of the SVB bank could accelerate this decoupling. The consequences for start-ups in China are not yet foreseeable.
In the Asia Techonomics column, Nicole Bastian, Sabine Gusbeth, Dana Heide, Martin Kölling and Mathias Peer take turns writing weekly about the most exciting technological and economic trends in the world’s most dynamic region.
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