CNBC's The China Connection newsletter: From Didi to DeepSeek

Foreign investors are notably returning to China's venture capital market, with U.S. dollar-denominated funds successfully raising significant capital, exemplified by BAI Capital's $800 million and Future Capital's $210 million funds. This resurgence, driven by a buoyant Hong Kong IPO market, Beijing's pro-business signals, and excitement around AI innovation, marks a significant recovery from the post-Didi IPO regulatory headwinds. Concurrently, a growing trend sees investors directly acquiring secondary stakes in major private tech firms like ByteDance, whose valuation has surged, reflecting a strategic shift towards liquid exposure to diversified AI assets.

Analysis

A notable resurgence of foreign capital is underway in China's venture ecosystem, marking a reversal from the post-2021 Didi IPO downturn. This renewed interest is evidenced by successful U.S. dollar-denominated fundraises, such as BAI Capital's new $800 million fund and Future Capital's record $210 million fund. The momentum is underpinned by a buoyant Hong Kong IPO market, which is on track to surpass Wall Street, and Beijing's recent pro-business signaling, contributing to the Hang Seng Index's over 20% year-to-date surge. Concurrently, a strategic shift is occurring in capital allocation, with limited partners increasingly bypassing traditional VC funds for direct secondary stakes in private tech behemoths like ByteDance. The valuation of ByteDance has soared from $245 billion to $340 billion this year, as investors view it as a liquid proxy for the AI sector, akin to an ETF, due to its diversified assets like Douyin and the Doubao AI chatbot. This trend is further exemplified by Tencent, which saw profits from its associates and joint ventures surge nearly five-fold. Despite this optimism, significant macroeconomic risks persist, including steepening declines in real estate investment and weak consumer spending, alongside forecasts of an economic slowdown in the second half of 2025 as export growth wanes. Geopolitical tensions with the U.S. also remain a critical headwind, even as specific positive developments like Nvidia's planned resumption of H20 chip sales to China emerge.

Key Decisions for Investors

• Consider re-evaluating exposure to Chinese venture capital, noting the renewed fundraising momentum in U.S. dollar funds and a stronger Hong Kong IPO market, which improves the outlook for exit liquidity.
• For exposure to China's AI theme, look beyond early-stage ventures to established private giants like ByteDance or public majors like Tencent, which offer diversified, liquid access to the sector's growth.
• Investors should closely monitor China's domestic economic data, particularly real estate and consumption figures, as well as the trajectory of U.S.-China relations, as these factors present material risks to the current market rally.
• The planned resumption of Nvidia's advanced chip sales to China is a positive signal for the domestic tech supply chain, potentially benefiting Chinese AI companies, though this remains vulnerable to shifts in U.S. policy.