China & Innovation - Part 2: The Good, the Bad and the Bubbly

FOREWORD

Taipei, October 2026

This second installment is republished as it first appeared on LinkedIn on 6 September 2018, written from Shanghai during my time leading the Swedish Chamber of Commerce in China. It has been lightly copyedited for typos; the text is otherwise unchanged. The overvaluation assessment held, including the prediction that public listings at those valuations would force a rationalization of pre-exit pricing. The claim that aged worst is the "remarkably hands-off" attitude of the authorities: from the suspended Ant Group listing in November 2020, the same authorities re-regulated finance, platforms, education and gaming within a year. The piece's own caveat, that corrective legislation can arrive without much notice, points to why. The text follows as published.

Shanghai, 6 Sep. 2018

Over the last decade or so, China has very purposely been transforming itself into one of the global innovators, pulling the entrepreneurial center of gravity towards Asia. Yet, it is not a place that often comes to mind when thinking about global disruption.

In the first part of this article, we started by having a look at how China got here, and why it matters. In the second part, we will focus our attention on some of the opportunities and challenges of this new growth model.

What is the landscape like today?

The most obvious pull of the Chinese economy is of course the size of its market. At 1.4 billion people, its population is 1.7 times the size of the USA and EU combined, with entire countries' citizenry fitting within that first decimal alone. That is the kind of headline-grabbing figures that captures the attention of outward-looking companies worldwide.

But beyond the size itself, market penetration and willingness to serve the domestic consumers are arguably more interesting to follow, in growth markets in general and China in particular. Consider this: today, only around 11% of the total population constitute the so-called Urban Middle Class, and of all workers in the country, only 2% earn enough to even pay income tax.

In other words, the overall population may be big, but its accessible share is very limited. As a consequence, with an annual population increase plateauing at around 0.5%, the current growth in per capita disposable income of households of around 8% makes for a far better indicator of the evolution of the market size for innovative goods and services.

Another factor strongly in favor of a growing innovation scene is the relative laissez-faire approach by the authorities towards large-scale adoption. As mentioned in the first part of this article, the official attitude towards technology (with the notable exception of cryptocurrencies) has been remarkably hands-off, enabling the fast deployment of new business models.

This has not always been without its own challenges, as famously illustrated by the heaps of shared bikes awaiting recycling that made the headlines shortly after the launch of Mobike, ofo, and others. Further still: legislation aimed at addressing the unforeseen consequences of an initial laissez-faire can come into force without much notice, or much guidance on implementation.

There is nevertheless plenty of room for experimentation, and that holds for most sectors. How much of that permissive attitude is based on the fear of missing out, and how much of it is due to active policy-setting, is of course difficult to assess. But while most industries have benefited from a hands-off attitude, it is clear that the traditional top-down approach has not been entirely forgotten in others, deemed of national importance, such as Artificial Intelligence.

From an investment point of view, several elements distinguish the Chinese landscape from its American or European counterparts. In Part 1, the historic importance of the four giants Alibaba, Tencent, Baidu and JD.com was laid bare. But their involvement in startups and innovation is not only heavy, it also goes far beyond financing. With targeted investments into startups, they further their own interests in the fierce competition between their respective ecosystems, effectively forcing many new players to choose sides.

And then, of course, there have been worries that the enormous valuations seen in Chinese startups aren't sustainable. According to a recent Reuters brief, these can be 30 to 40% more expensive than their US counterparts with some valued at as much as twice the price tag for a North American equivalent. In 2017, investors pledged a colossal USD 180 billion towards private ventures.

Again, a fear of missing out on the next big thing, and the big players out-spending each other, are likely to have played a role in the money shower on new ventures during the past two or three years. On a more rational note, it is also likely that the much larger market potential is motivating investors to open their wallets wider.

What is certain, in any case, is that the market is evolving. From fields of entrepreneurial sprouts watered indiscriminately by sprinklers of VC-money, the first half of 2018 has witnessed the emergence of larger irrigation channels dedicated to the fewer mature crops. The number of VC funds successfully raised during H1 2018 was down 20% year-on-year, while their total value plummeted by 75%.

The number of funding deals was also down slightly (6%), but, crucially both their total value and average size were on the increase, giving rise to "mega-deals" worth in excess of USD 500 million. The picture is further nuanced by the fact that if investments in early-stage startups during the same period were on the decrease, those in later-stage rounds were simultaneously on the increase, strengthening the picture of a market moving up on the maturity ladder.

This evolution is not entirely organic, though, and one should also factor in the influence of external elements. As is often the case, stability is a main concern for the authorities, leading the financial regulators to move in April to rein in the asset management industry, contributing to a thinning out of venture capital. There are also restrictions in place on cross-border capital flows and increased customs tariffs, both domestically on inbound goods and abroad on outbound trade.

Due in part to the increased difficulty of raising capital from private investors, and in part to valuations that have made them virtually unbuyable by private entities, Chinese startups have also been rushed towards the IPO exit, although entering the public markets at such eye-popping valuations comes with challenges of its own and is likely to eventually feed back into a rationalization of pre-exit valuations.

What to make of all this?

The Chinese innovation ecosystem is young and evolving. It is enormous and a mostly submerged iceberg, with the potential to better the lives of billions of people through more convenient services, new and greener technologies, more efficient healthcare, etc., with all the opportunities that it entails for foreign actors. It is also an environment that is far from perfect and, moving fast as it is, is patching its own short-comings as it goes - with its own political, economic and cultural challenges.