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

This report is from this week’s CNBC’s The China Connection newsletter, which brings you insights and analysis on what’s driving the world’s second-largest economy. Each week, we’ll explore the biggest business stories in China, give a lowdown on market moves and help you set up for the week ahead. Like what you see? You can subscribe here.

There’s a murmur of excitement in China’s venture capital circles these days: foreign investors are starting to return with U.S. dollars.

It’s a result of DeepSeek’s AI disruption, coupled with a buoyant Hong Kong IPO market on track to surpass Wall Street this year as the world’s largest by money raised. Beijing’s signals to support businesses in recent months have also helped.

The Hang Seng Index’s surge of over 20% so far this year reflects near-term optimism. Another sign comes from word of Chinese venture capital firms raising U.S. dollar-denominated funds again, after a dry spell in which the VCs had to turn to local investors with Chinese yuan funds.

Beijing-based BAI Capital said it started raising for a new $800 million fund in February and plans to close the initial round in September. The firm is supported by German global media conglomerate Bertelsmann Group.

BAI said it’s seen “strong interest” for the U.S. dollar-denominated fund, which it will then use to invest in China-based companies. To date, the firm has already invested in 10 companies that plan to go public in the next one to two years.

Future Capital Discovery Fund, an early backer of high-flying electric car startup Li Auto, told me it raised a record $210 million for a U.S. dollar-denominated flagship fund in the second half of last year.

“Once there is a fundraising window, we must quickly seize the opportunity to raise funds,” Mingming Huang, founding partner at Beijing-based Future Capital, said in Chinese, translated by CNBC. “This is very different from the long-standing practice of raising U.S. dollars from the market every few years.”

“Now we need to be very sensitive to macro trends, especially the direction of relations between major economies,” he said. The firm, which counts investors including sovereign wealth funds and endowments from the Middle East, U.S., Europe, Japan and Southeast Asia, has plans to deploy capital for AI agents and hardware.

But it’s been a tough few years for China VCs and their limited partners.

In the VC world, a firm raises money from a range of “limited partners,” which include sovereign wealth funds, pension funds, university endowments and family offices. While getting paid to manage the fund, the VC then chooses startups to back, reaping a reward from the companies’ IPOs that is shared with the limited partners.

The fallout around Chinese ride-hailing company Didi’s New York IPO in June 2021, on the eve of the ruling Chinese Communist Party’s 100^th anniversary – despite multiple warnings from Beijing about data privacy breaches – did not sit well with regulators on both sides of the ocean. Didi was backed by a long list of prominent investors across numerous funding rounds, including ,  and Sequoia Capital.

China would later raise the bar for its companies wanting to list overseas, while Washington ramped up its scrutiny of U.S. capital heading to China, dampening fundraising activity on the mainland, particularly for cross-border investments.

Notably, Sequoia Capital China split off from its U.S. parent in 2023 and rebranded under HSG. It did not respond to a request for comment about their latest U.S. dollar fundraising plans. Other VCs that have spun off or restructured their China arms include GGV Capital, which became Granite Asia, and California-based Matrix, which rebranded its Chinese operations as MPCi last year.

Not everything is the same as it was in the pre-Didi IPO years.

Rather than giving money to a venture capital firm, many limited partners based in Europe, the Middle East and Asia prefer to directly buy ownership stakes in private companies such as Chinese internet giants ByteDance and Xiaohongshu, said Hope Xu, a venture capitalist. She left Source Code Capital last year to start her own firm, called Density 590, focusing on such deals, known as secondaries, which include single-asset sales and stakes in funds.

Even though the Beijing-based TikTok parent isn’t publicly listed, the demand for its shares is so high that they are essentially as easy to liquidate, or sell, as they would be on a publicly listed exchange, she said. While the sellers tend to mostly come from the U.S. and Asia, Xu said the buyers typically come from the EU, the Middle East or Asia.

It’s a big opportunity for returns.

ByteDance’s valuation has surged from $245 billion at the start of this year to $340 billion, she said Tuesday, noting that investors are starting to accept the uncertainty of the U.S.-TikTok divestiture.

ByteDance declined to comment on its valuation.

The company has become a quiet force in China’s internet realm. Besides owning a popular Chinese TikTok equivalent called Douyin — which surpassed JD.com last year to become the second-largest ecommerce platform by gross sales — ByteDance has also developed a popular AI chatbot called Doubao, along with an AI agent platform named Coze.

Xu pointed out that for tech investments such as AI and robotics, the resources and capital needed are vast, making it difficult for smaller startups. Buying a stake in a big company, such as ByteDance, with its diverse product lines, is essentially like buying an AI exchange-traded fund, she said.

For example, Tencent is not only developing its own AI models and applications, but also investing in AI startups. It reported a nearly five-fold surge in profits from its business associates and joint ventures last year, rising from 5.8 billion yuan to 25.2 billion yuan over 12 months, according to the company’s annual report.

The China VC world is also no longer just focused on the domestic market.

Citing the macroeconomic environment and tech trends, BAI Capital said its investments will be split between local and overseas startups. Half of its funds will go towards China-based companies looking to expand worldwide in fintech, entertainment, AI and supply chains, while the other half of its funds will focus on consumer, healthcare and technology opportunities in China, BAI said.

Since 2019, BAI said it has invested in multiple rounds in Stori, a digital bank in Mexico with 3.6 million credit card users and 2.4 million depositors. “We believe Stori’s success is not an isolated case.”

The question is how long these VCs and their limited partners can remain enthused. The Hong Kong Stock Exchange last week proudly announced its busiest day for IPOs and ETF launches to date: with six gongs on stage. 

James Peng, CEO of autonomous driving company Pony AI, talks about Uber founder Travis Kalanick’s possible interest in acquiring the company’s US operations.

Louise Loo, head of Asia economics at Oxford Economics says that while China’s economic growth is likely to slow in the second half of 2025 due to the ‘spectacular growth engine’ of exports ceasing to provide the same impetus, there is a silver lining in the fact that demand for goods from China’s advanced manufacturing sector are not easily substitutable and would remain relatively resilient despite tariffs headwinds.

Angela Stent, senior fellow at Brookings Institution, says Russian President Vladimir Putin counted on Chinese President Xi Jinping’s support when he invaded Ukraine – and continues to count on Beijing’s economic support and diplomatic support on a global stage.

Mainland China and Hong Kong stocks are mixed on Wednesday amid mixed trading in the region, as investors assessed U.S. President Donald Trump’s statement of having reached a preliminary trade deal with Indonesia.

Mainland China’s CSI 300 was down 0.35%, while Hong Kong’s Hang Seng Index — which includes major Chinese companies — had gained 0.15% as of 1:12 p.m. local time. The mainland benchmark is up around 1.8% year to date, data from LSEG showed.

July 21: People’s Bank of China monthly decision on benchmark loan prime rate