> ## Content Index > Fetch the complete content index at: https://martin-vercouter.ghost.io/llms.txt > Use this file to discover other available public pages before exploring further. # China & Innovation - Part 3: Meltdown? The state of innovation in the midst of the Trade War - URL: https://martin-vercouter.ghost.io/china-innovation-part-3-meltdown-the-state-of-innovation-in-the-midst-of-the-trade-war/ - Published: 2026-08-30T21:45:58.000Z - Updated: 2026-09-01T01:38:45.000Z - Author: Martin Vercouter - Tags: PAPER, #MV 003 FOREWORD Taipei, October 2026 *This final installment is republished as it first appeared on LinkedIn on 16 July 2019, written from Beijing in my last weeks leading the Swedish Chamber of Commerce in China. It has been lightly copyedited for typos; the text is otherwise unchanged, and the figures have been redrawn from the 2019 data as published, still ending where 2019 ended.* --- Beijing, 16 Jul. 2019 The headlines have been alarming lately: China's tech scene is melting down and venture capital is drying up. The China-USA trade conflict is stifling economic growth and, with it, entrepreneurs. Meanwhile, the Chinese authorities have brought forward a further opening up of the financial sector, and are working to promote domestic listings of tech startups. ### What to make of all this? ยง Note [Pt. 1 - How it got here...](https://martin-vercouter.ghost.io/china-innovation-part-1-how-it-got-here-and-why-it-matters/) [Pt. 2 - The Good, the Bad,...](https://martin-vercouter.ghost.io/china-innovation-part-2-the-good-the-bad-and-the-bubbly/) In the first and second part of this series, we have looked at the history of China's innovation scene (pt.1), as well as its strengths and weaknesses (pt.2). Back then, right after Ant Financial's enormous USD 14 billion round, there were already concerns about startup overvaluations and the sustainability of the industry's break-neck growth. A year on, it would seem like sobriety has finally set in or, as the SCMP has it, the hangover. Perhaps, though, there is more to it... First, a recap. Right up until Q2'18, the amount of venture capital invested in China had been on the increase for almost a decade, in earnest since 2014\. Over time, deals tended to become fewer but larger, and focused increasingly on later-stage rounds in more mature startups. Indeed, some of these deals started to raise eyebrows, as they frequently were worth in excess of USD 1 billion, producing companies valued sometimes well above USD 10 billion (a whole 75 for Bytedance). To make matters worse, this massive input of capital is in many cases used to fuel aggressive growth by subsidizing mass user acquisition, raising profitability concerns. \[Insert Figure 1: part3\_fig1\_timeline.png - caption and source line are inside the image\] As noted earlier, in part one of this series, those amounts "made \[startups\] virtually unbuyable by private entities" while at the same time "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". These limitations became clear towards the end of 2018, when many of these more mature companies rushed for the exit, and the value of private sales and IPOs soared to historical heights. These IPOs, in turn, have largely been made outside of the Chinese mainland, with the USA and Hong Kong SAR being favorite destinations. The rationale behind not listing in Shenzhen or Shanghai has often involved a combination of the complexity of the approval-based process, strict profitability and revenue criteria, limitations to the types of shares sold, currency convertibility issues, and ineligibility due to the use of Variable Interest Entities to circumvent restrictions on foreign ownership, among others. Besides valuations and exits, the Chinese innovation landscape is also special in that it is funded to a much broader extent than in any other ecosystem by Corporate VC. During Q1'19, established companies' investment arms participated in nearly 35% of the deal count in Asia. Elsewhere that number is closer to 20%. Not only do large corporations participate in a large number of deals, but they also use these as tools to wage a war of ecosystems, i.e. each giant tries to further the use of its integrated solutions with strategic investments. ### Now what? The reports for Q2'19 show that the value of deals during the quarter was down 77% from the same period last year. Admittedly, March to June 2018 saw the largest ever funding spree in China, which only accentuates the difference. But after four consecutive quarterly contractions and figures not seen since 2015, the news reports are understandably worrying. \[Insert Figure 2: part3\_fig2\_vc-investments\] For sure, using VC activity as a proxy for the overall tech industry is an imperfect tool. But the picture is further confirmed by recent reports of hiring freezes and increasing unemployment among tech workers. Corporate investors, exposed to the wider economic downturn, seem to be following suit, and their participation in funding deals has plummeted by almost 10 percentage points across Asia. Meanwhile, the US administration is very clearly targeting Chinese-developed technology in the ongoing trade conflict. Restrictions were put in place, later partially lifted, preventing American firms from doing business with Huawei. Political pressure was also applied on allies to limit the firm's involvement in developing 5G infrastructure, among others. Others like ZTE and DJI have been made to feel the heat. And the Chinese stock markets took a serious dip, by nearly a fourth of their value over the course of 2018. Against that background, the Chinese authorities have introduced a series of reforms to try and mitigate the recent slowdown and negotiate the economy's changing of gears (with a trailer full of corporate debt in tow). Announced in November 2018 and due to start trading on July 22 is the new Science and Technology Innovation Board (STAR) in Shanghai. This new exchange comes with a flurry of reforms aiming to encourage listings of new tech companies: a registration- rather than approval-based IPO mechanism, the possibility to list for firms that are yet to turn a profit, and more market-based valuations with the absence of cap on the shares' price-earning ratio. In parallel, the new Foreign Investment Law was adopted in March of 2019 and due to come into force on January 1, 2020, ostensibly to facilitate foreign investments into China, and the everyday life of foreign-invested companies in the country (there are, still, many limitations to this piece of legislation, as well as a broad range of outstanding concerns, but that is the topic of another discussion). In a surprise move two weeks ago, on July 2, Prime Minister Li Keqiang announced that the authorities would bring forward plans to allow foreign majority ownership of Chinese securities firms to 2020, in a sign that the country is looking to attract more outside capital amid a general FDI slowdown. \[Insert Figure 3: part3\_fig3\_fdi\] Looking at the timing of these announcements, it would be compelling to lay the current slowing down in tech investments and subsequent policy reforms squarely at the feet of the trade conflict. And it is for sure playing a role in bringing those matters to the fore, probably accelerating the pace of reforms. The uncertainty also weighs down on investor sentiment. But correlation shouldn't be mistaken for causation. These should arguably rather be seen as different consequences of the same phenomenon: a maturing Chinese economy in general, and high-tech industry including innovation in particular. The distinction is important because it enables us to assess future prospects. Internationally, established world powers are left searching for a way to deal with this break away from a unipolar, Western-led model. Domestically, China's nascent position on the technological world stage, and indeed the whole innovation and consumption-led economic growth model, is also a novelty. What it means in terms of the process of policymaking, but also the maturity of the players in the market, should not be overlooked. As is often the case in the Chinese context, progress comes through iterations, and iteration means mistakes being made and learned from. As we saw above, the first few years of substantial investment activity saw a shower of venture capital rain down on a wide array of new companies, often with little more to their name than a glossy pitch deck. Valuations soared, doubts appeared. It is only normal that the market would return to a more reasonable situation. Indeed, there are signs pointing to just that: the data for Q2'19 shows that, while total deal value was down in China, deal count soared back to the levels of 2016-2017, indicating a return to smaller and more numerous fundings. Whether this is merely a quarterly fluctuation or the beginning of a new trend is of course hard to tell at this point. \[Insert Figure 4: part3\_fig4\_unicorn-share\] What is crucial, however, is that this drive towards innovation-based economic growth is a deep-rooted development. It is born out of a desire to catch up with developed countries and stand on an equal footing. Much can be written about how it is done, but it is nonetheless essential to factor in when assessing long-term prospects. Immediate funding activity is probably not going to pick up significantly for as long as the uncertainty remains, and the eye-popping deals of 2018 may well be a thing of the past for now. But, as we saw in part one, barring any major conflict, "the human capital formed in this ecosystem \[...\] is unlikely to disappear, should a potential bubble burst, just like the innovative trend overall survived the dot-com blowout 20 years ago". The past four decades have been slowly leading up to this point, and with that momentum comes resilience. ### Beyond. The real question, then, is whether China's technological development will happen in isolation - with the danger of the world facing two or more potentially incompatible environments - or in an integrated way through engagement and dialogue. It is important for China, but perhaps even more so for the currently dominant economies who have built their success on technological leadership. As we are moving towards less interconnected technological environments, do we really understand how we got here and what it means for our ability to exchange in other areas? If that is where we are heading, are we prepared for a multi-polar world with technology at its heart?