Semiconductor, AI firms dominate venture capital deals in China amid government push

China's largest venture capital investments are increasingly coming from technology sectors that align with the government's policy goals, such as artificial intelligence (AI) and semiconductors, even as overall funding continues to plunge, according to a new report.

The country contributed 90 per cent of global venture capital investments in the chip sector last year, totalling US$22.2 billion and more than doubling the US$9.5 billion invested in 2022, research firm Preqin said in a report released on Thursday.

Half of the semiconductor venture investments came from three "mega deals" led by partnerships between municipal authorities and Sino IC Capital, the asset manager of the state-backed China Integrated Circuit Industry Investment Fund, known also as the Big Fund, according to Preqin.

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Those include the 39 billion yuan (US$5.4 billion) raised by Changxin Xinqiao Memory Technologies in October, US$4 billion by Hua Hong Grace Semiconductor in January last year, and US$3.2 billion by Hua Hong Chengdu in December, according to Preqin.

Fundraising in China's semiconductor sector appears to have slowed down since, with only US$1.6 billion invested across 128 deals in the first half of this year, Preqin data showed, although the country still accounted for four of the world's 10 largest chip industry investments during that period.

State-backed investors are playing a growing role in private market funding in China, participating in about 60 of the 100 largest deals from 2021 to June this year, twice as many as from 2017 to 2020, the research company said.

AI and clean technology, two other sectors that China aims to grow and support as part of its broader economic policies, also recorded large investments this year, Preqin said.

Among the world's 10 largest venture investment deals from January to June, two took place in China. Electric vehicle manufacturer IM Motors raised US$1.1 billion in March. Generative AI start-up Moonshot AI raised US$1 billion in February. Both companies are backed by Alibaba Group Holding, owner of the South China Morning Post.

Overall, AI firms in China raised US$5.6 billion in the first half of 2024, about half of the US$11.7 billion raised in the sector during all of last year, according to the firm.

However, geopolitical tensions, high interest rates and a lack of exit pathways continue to deter private investments.

Private firms in Greater China, which includes Hong Kong, Macau and Taiwan, raised US$12.3 billion in the first three months of the year, down 42 per cent from the previous quarter and a "far steeper drop" than the global decline of 12 per cent, Preqin said.

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