“Investors’ appetite for China tech remains intact. What has changed, however, is where they park their money,” says Jiang Jingjing, a lawyer who specialises in fundraisings at King & Wood Mallesons in Hong Kong. “It has become quite clear that more and more funding has flowed to start-ups with cutting-edge technology.”

China is still well behind Silicon Valley in venture investing overall. The US reached its own record of US$296.6 billion last year, more than twice the total for China.

“In China right now, it’s getting crazy,” says Yong Luo, a former Intel engineer who raised money for a new semiconductor start-up, though he’s probably two years from generating revenue. “The chip sector is really hot.”

This is almost precisely how President Xi Jinping’s central planners would have imagined it in their five-year plans. The Communist Party has decried the corrupting influence of games (Tencent) and online videos (ByteDance), while pushing for more resources to be allocated to fundamental research.

That shift is aimed at helping reduce the country’s dependence on US suppliers – a top priority for Xi’s administration after American blacklistings hit key players like Huawei Technologies Co and SenseTime Group.

In its latest five-year economic blueprint unveiled in March, Beijing sketched out plans to boost national R&D spending by more than 7 per cent annually and singled out seven technological fields in which it hopes to achieve “major breakthroughs.” They include space exploration, brain science and quantum information – all sectors where American firms now hold sway.

The Chinese government is also making big bets on emerging technologies like hydrogen vehicles and biotechnology, while working to help its semiconductor industry narrow the gap with the likes of Intel and Taiwan Semiconductor Manufacturing Co.

“The Chinese government is very aware of the importance of innovation for China’s future, in particular to cushion the impact of ageing and excessive capital accumulation on growth,” says Alicia García-Herrero, an economist at investment bank Natixis in Hong Kong. “Investment in deep tech is absolutely key.”

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Singles’ Day 2021 in China shifts focus from consumerism to social responsibility

Singles’ Day 2021 in China shifts focus from consumerism to social responsibility

There is no guarantee the strategy will work. China built a generation of technology giants by letting talented entrepreneurs like Alibaba’s Jack Ma and ByteDance’s Zhang Yiming choose their own path to success. Now that private-sector innovation has been subordinated to a much more government-directed model.

In a sign of the need for caution, the country’s one-time semiconductor champion collapsed in 2021 after years of government financing and political support. Tsinghua Unigroup spent a decade binging on easy credit and buying up foreign assets only to implode as the government recognised its multibillion-dollar debts had not got the country any closer to building a sustainable chip business.

Beijing’s crackdown has narrowed the range of sectors considered safe for investment, leading to inflation in start-up valuations as venture capitalists all compete for the same kinds of deals. Investors joke about the money lavished on “PPT companies,” or start-ups with nothing more than a PowerPoint presentation.

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“The acceleration and the pronounced emphasis of the government on these areas has just driven so much capital in this direction,” says Chibo Tang, a managing partner of Gobi Partners. “It has a risk of becoming overheated.”

China’s pivot to hard-core tech has been years in the making. It took off in earnest in 2018 after Washington banned exports of US technology to ZTE. The once-prominent telecoms equipment giant had to shut down large swathes of its operations – laying bare Chinese companies’ vulnerability to American political decisions. The effort gained even more momentum with the blacklisting of Huawei, China’s leading maker of communications equipment.

Now, China’s enthusiasm for fundamental technology has spread nationwide. In Guiyang city of southwest China, Angelo Yu, founder of Pix Moving, used to scratch his head trying to win over investors who questioned the capital-intensive, time-consuming nature of his autonomous driving business. But with Beijing’s clampdown on internet companies last year, all those doubts suddenly vanished.

“There is a sea change in investors’ attitude toward deep tech,” Yu said. “In 2020, whether or not we could fundraise was still a question mark. This year, fundraising isn’t an issue any more. The question has become at what valuation we’d like to raise funding.”

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Easier access to capital, combined with a greater demand for made-in-China tech solutions, has lured more talent to entrepreneurship. One prominent example is Yuan Jie, a professor at the Hong Kong University of Science and Technology.

The long-time academic spent much of his career helping global giants like Intel advance their chip technology. Now, Yuan has founded Atom Semiconductor Technologies to make his own silicon. Established in late 2020, the start-up has completed two rounds of fundraising and quadrupled its valuation, paving the way for Yuan to commercialise his years-long research.

Beijing-based Sinovation Ventures, a technology venture firm founded by former Google executive Kai-fu Lee, plans to spend every single dollar it raises this year on investments related to deep tech and life sciences. That is up from about 10 per cent that Lee allocated to those sectors in 2010.

Gary Rieschel, founding managing director of Qiming Venture Partners, says deep tech start-ups now account for about 40 per cent of his firm’s portfolio, compared with 10 per cent in 2014.

“That is what you’re seeing with all the venture firms now,” Rieschel says. “They’re making those transitions.”