For the first time in history, China has overtaken the United States in terms of funding for start-up companies. The data was recently released by Goldman Sachs and it revealed that China-based companies have accumulated more than $30 billion in venture capital for the second quarter of the year. In contrast, the United States was able to attract $27.2 billion.
Many market analysts partly attributed this sudden surge in Chinese funding to Alibaba's affiliate Ant Financial which was responsible for about $14 billion as part of the largest deal ever in history. Many have also pointed out that activity in the Chinese venture capital sector has been steadily improving in the last few years.
McDonough School of Business Professor of Strategy and Economics Arthur Dong said that the heightened interest in the Chinese venture capital market can be traced back to the time when China President Xi Jinping announced the China 2025 initiative.
China 2025 is a strategic initiative that aims to accelerate China's economic transition from the current low-end manufacturing sector towards a high technology and innovation-driven market. Mr. Dong said that this particular strategy has been employed by many top economies, most notable of these in Japan. As the law of diminishing return slowly crept through China's low-end manufacturing industry, the need to transition into higher-value-added strategy is fundamental to China's vision of sustaining its economic boom.
At the heart of this success are the top policymakers in China. By employing a strategy of directed investments, several Chinese banks and financial institutions can funnel funds directly the industry sectors provided that they have high priority which is set by the government as well.
Based on the recently released data, it would appear that China's completed venture capital rounds increased by as much as 400% when compared to the same quarter in 2017. Incidentally, completed venture capital rounds in Silicon Valley have decreased by as much as 60 percent in recent years.
Despite China's continued growth, many observers said that the power dynamics between the country and the United States will not be easily shifted. Nevertheless, many are still convinced that with the China 2025 initiative showing early signs of success, it will only be a matter of years before China finally overtook the U.S. as the world's biggest economy. Mr. Dong said that one of the keys to this success will be China's innovative and homegrown tech companies
