China VCs Want USD, Not RMB for Their Funds
As China shakes off the last of Covid-19, and looks towards a more optimistic 2021, venture capital and private equity funds are in the midst of closing rounds in order to have capital ready to deploy to catch the upswing of the economy. But aside from Covid-19, the other theme of 2020 continues to be the trade war: tariffs and embargoes from the US have been matched by a China that’s trying to be more assertive and less dependent on international trade. Part of China's play is also an attempt to internationalize the RMB, through things like DCEP and discouraging the use of the USD. Despite all of this, what currency do VCs want in their funds? USD.
In the past few days, a number of prominent China-based funds have announced that they are successfully closing large USD rounds or are in the final stages of doing so. The Information reported that Jack Ma’s Yunfeng Capital is finishing off its fundraise worth $3 billion. With a similar approach, Qiming Venture Partners, a China-based and focused fund, announced it had recently closed off its $1.2 billion fund. Likewise, GGV Capital raised $2.5 billion, and Future Capital $187 million.
According to AVCJ Research, China VCs and private equity funds have so far raised approximately $15.9 billion in foreign currencies this year, which is down from the $28.6 billion they raised last year, but also in line with the gradual challenges the China VC and private equity industry is facing raising funds. The Information reports that the usual stalwart US institutional investors like pension funds, university endowments, family offices still have a strong appetite for USD-denominated China-focused funds and are looking to send over capital.
But all this might be surprising for those that watch China-US relations. According to reports, the White House is increasing its scrutiny on pension funds and college endowments making it harder for these institutions to invest in Chinese firms. Remember: some of the biggest private equity deals in the Chinese tech ecosystem were closed because of the backing of US institutional capital. Without it, there's a lot less capital to work with. In addition, the White House recently announced that US entities will soon be banned from investing in Chinese firms that assist the People’s Liberation Army in technological development. Although the list currently names 31 companies, it is subject to be revised and expanded. Militaries around the world are big investors in AI research, and what’s to say that the hottest Chinese AI startup of 2021 won’t find its way on this list?
The other big risk comes from enforcement action from the Chinese government. Recently, the initial public offering of Ant Group, which was on track to being the world’s biggest IPO at $313 billion, was scuttled because of clashes between Ant parent Alibaba CEO Jack Ma and regulators. Per the Wall Street Journal’s reporting, the ultimate order to axe the IPO came from Xi Jinping himself after Ma criticized the “pawnshop mentality" of banks and regulators that have “have only focused on risks and overlooked development.”
China VCs Need USD for Liquidity, US Funds Need the Multiplier
Despite all these risks, it comes down to the age-old question of liquidity and multipliers. Chinese firms need foreign investment because despite the country’s rise to the place of the world’s second-largest economy, the renminbi is no challenger to the USD.
The dollar is still used in 88% of all transactions globally, versus just over 2% for the RMB. If a VC’s portfolio company wants to expand abroad, firms it might acquire or services it will procure are going to be priced in USD. Of course a firm can always exchange its USD for RMB, but that comes at a big premium.
There are major risks involved in Chinese firms fundraising in USD, and US funds investing in China. Clearly, however, there’s an appetite on both sides and money to be made.