Corona worries are causing business start-ups in China to collapse

Peking Due to the corona lockdowns and stricter regulation, start-ups and start-up financing in China collapsed in the first five months. Almost 30 percent fewer companies were registered in the four largest cities Beijing, Shanghai, Guangzhou and Shenzhen compared to the previous year.

Only half as many companies were founded in the economic metropolis of Shanghai as in the previous year. During the lockdown in April and May, company registrations even fell by more than 80 percent.

This is shown by data collected exclusively for the Handelsblatt by the market research and data analysis company CIMK. The start-up from Nanjing analyzed information on 2.7 million newly founded companies in China’s 18 largest cities in the period from January 2019 to May 2022. CIMK specializes in pulling large amounts of data from public databases and social media in China and derive trends from them.

The CIMK data shows the effects of the lockdowns on the Chinese start-up scene. Overall, the number of company registrations in the 18 cities surveyed fell by 13 percent. The decline in start-ups in the IT and software as well as education and entertainment sectors was particularly large. These sectors were particularly hard hit by the wave of regulations last year.

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But not only founders, but also investors are more cautious. Investments in start-ups have recently fallen significantly. As a result, the financial situation of many companies threatens to deteriorate in the second half of the year, says CIMK founder and CEO Lukas Tatge.

>> Read also: European corporate sentiment in China is at rock bottom

The longer the uncertainty amid recurring lockdowns continues, the more the country faces a “lost generation of businesses – with major long-term implications,” Chang-Tai Hsieh, an economics professor at the University of Chicago, told Bloomberg. Business start-ups have been a key driver of productivity in China in recent decades. After the end of the most recent lockdowns, company registrations increased again. However, it is unclear whether the resulting gap can be closed in this way.

Beijing is currently at the forefront when it comes to start-ups

The temporary lockdown in the tech metropolis of Shenzhen in March had repercussions: between March and May, a third fewer companies were registered in the southern Chinese city than in the same period last year.

China expert Tatge says Shanghai, Guangzhou and Shenzhen, where most technology companies have been founded in recent years, have become less attractive as a result of the lockdowns. Instead, second-tier metropolises such as Chengdu, Chongqing or Hangzhou are increasingly attracting founders.

Of the four largest cities in China, only Beijing founded more companies in the first five months than in the previous year. As a result, Beijing is initially displacing Shanghai as the founding capital of China.

The increasing economic problems are also having a negative impact on corporate financing. In 2021, start-ups in China collected a record sum of more than 130 billion dollars. But this year the number of financing rounds is declining. In the 18 metropolises examined, it was “well below the pre-corona level” in the same period of 2019, with a minus of more than 50 percent, says Tatge.

The economic and regulatory uncertainties are too great. Akio Tanaka, who scouts for start-ups in Asia for the venture capital firm Headline from Beijing, is “currently very cautious” about investments in China.

Recently, the financial situation for start-ups has deteriorated worldwide. In the first three months, investments in young companies fell by 26 percent compared to the previous quarter, according to figures from the analysis company Pitchbook.

In China, a further complication is that since the summer of 2021, both the People’s Republic and the USA have raised the hurdles for Chinese companies to go public in the USA. Since then, only a few companies from China have made it onto Wall Street. The number of IPOs by Chinese companies in Hong Kong has also fallen sharply. This means that there is no lucrative exit option for venture capitalists.

Stricter regulation discourages tech founders

One reason for the lack of IPOs by Chinese tech companies abroad and the declining number of start-ups is the stricter regulation of the industry. The state leadership passed numerous laws last year to tighten control of tech platforms such as Alibaba and Tencent, which had been growing practically unregulated until then.

In addition to the large tech companies, Internet platforms in the areas of education, finance and online games were particularly affected. Educational portals were even banned from making profits, taking away the business basis for a large part of the $100 billion industry.

This also had an impact on start-ups: in Beijing, Shanghai, Guangzhou and Shenzhen, only five companies in the education sector have been registered this year so far. In all of last year there were more than 130.

>> Read also: Stocks crash, slump in growth, lockdown madness: The China crash

But the number of company start-ups is also declining sharply in the important IT and software sectors. While almost 60,000 new companies were registered in these sectors in the four metropolises in 2021 as a whole, there were only around 7,500 so far in 2022. Also significantly fewer founders ventured into the troubled construction, real estate and retail sectors.

Central, provincial and city governments are trying to counteract the slump with aid programs. “Special measures to support technology companies” were launched in Shanghai this week to support small and micro-enterprises in the sector. Among other things, the costs for start-ups are to be reduced.

More on this: Why China’s reputation as a location for innovation is suffering massively

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