China Technology: Blacklists are the most harmful to local start-ups

China Technology: Blacklists are the most harmful to local start-ups


China may soon Strict restrictions How local start-ups raise funds from foreign investors. For Beijing, sanctions will provide a way to enforce its strict capital controls and protect sensitive data of local companies. Although American investors will miss the opportunity, China’s own technology industry may ultimately suffer the most.

The blacklist program targets new companies in sensitive industries that use so-called variable interest entities to structure their China operations. This popular legal structure bypasses foreign ownership restrictions. More than one-third of mainland companies listed in the United States use VIEs. Restrictions may hit China’s data-intensive industries or industries that cause national security issues.

If it is to retaliate against the US restrictions on Chinese investment in Silicon Valley start-ups, the blacklist will certainly deal a blow to US investors. For many years, Chinese technology companies have been a source of great returns.

They were given a fair warning. After a year of suppression of delisting threats in Beijing and the United States, foreign venture capital invested more money—approximately US$24 billion in the third quarter—to support Chinese start-ups. The total investment this year is significantly higher than last year. Any restrictions on VIE must affect VC’s exit strategy.

Any existing company using the VIE structure is expected to be exempted. However, just five months ago, Beijing issued new regulations prohibiting tutoring companies from using VIEs without warning. Since then, many Chinese education companies listed in the United States have closed down. Tal Education’s share price has fallen 93% this year.

The timing is unfortunate. Beijing actively promotes self-sufficiency in big data. The government hopes to achieve this goal by tripling local industrial revenues to 3 trillion yuan (US$471 billion) in the next four years. Most mainland big data and artificial intelligence companies are private, early-stage companies that can take advantage of large amounts of funds from international investors.

Larger companies also benefit from listing on larger overseas stock markets. The recent failure of Chinese technology companies to list in Hong Kong means that the city may not offer attractive options.Artificial Intelligence Company SenseTime It has been decided to reduce the maximum scale of its planned listing from the initial plan of raising at least US$1 billion to US$767 million.

In the absence of foreign boosters, government spending will have to increase several times to support the development of the sector. In the long run, Beijing may hinder its own technological development, depending on how extensive the blacklist will be.

The Lex team is interested in hearing more comments from readers.Please tell us your thoughts on investing in companies in Mainland China in the comments section below

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