Has China stopped producing new companies? - Week in Review #27

Hi folks, a very quick review for this week.

#1 On FT’s claim that China has stopped producing “new companies”

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2024/9/17 Note: FT has made revisions and added caveats to the graph at the center of this controversy. Please bear in mind this new graph (below) will change the substance of my original post. I will still keep my note in its original form for you to see.

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The Financial Times recently published an article titled How China has ‘throttled’ its private sector and has attracted a lot of discussion. The basic premise of the article is that VC funding has been frozen in China and that new Chinese businesses being formed have plummeted almost to zero, using a highly dramatic chart below:

The FT story does have some strong merit. As I explained half a year ago in my China’s venture capital industry is dying article, VC funding in China has indeed ground to a halt.

But an important distinction has to be made here.

It seems that through the article, as well as some follow-up discussion between the author and the public, the FT has confused “new companies” with “new companies backed by VC” here. I believe FT was referring to the latter, but they seem to believe it’s also the former, as shown in the screenshot below.

This is very misleading.

New companies are still being formed all the time. According to government statistics:

In 2023, the number of newly established business entities was 32.73 million, with 0.027 million enterprises newly established per day on average.

This data is easily verifiable, as all public registration data (apart from some really sensitive businesses) in China is publicly available now. Contrary to what Eleanor, the author has claimed, mom-and-pop shops also need to register. You don’t operate a business, not even a small dim sum place in China without registering.

Now, “newly established businesses” according to company registration data is not an accurate gauge to look at how many new businesses have been founded either, as many newly registered businesses are holding companies to hold shares in other companies, or subsidiaries of an existing business, or some shell companies that exist only to obtain some subsidy programs. But, if I have to take a guess, “real” businesses being formed in China in 2023 should be at least 1 million if you only assume ~3% of the newly registered companies are “real”.

This number is still way higher than what FT is making people believe here.

So, the FT article is really not a matter of whether new companies are dead in China, but whether VCs are dead. VCs (in its traditional sense) are indeed dead, like what I wrote about in that article. But that doesn’t mean people are not creating businesses anymore. People are just not creating businesses that require VC money to survive. People are creating businesses that rely on good old cashflows to survive. The business owner I talked about who does live-streaming and has just opened a new BBQ place in Xuzhou in Baiguan’s paying member community represents just one of those “new companies”. (I also shared this on LinkedIn later.)

This reminds of me of a recent conversation with a top-tier angel investor in China. The investor asked me whether I would want to make our company sound more “AI”-ish, so that we could be able to attract more VC funding, even if it may be just a story with nothing substantial. My answer was: if we were still a “2VC” company, we might want to do that. But we have gone beyond this stage. So, no.

“2VC” means the kind of businesses that, instead of making good products for consumers (2C) or making good products for businesses (2B), they exist to craft their story according to the taste of capital markets in order to maximize rounds of rounds of VC funding, in the eventual hope of doing a successful IPO and dumping their shares to unwitting public investors.

The “2VC” age is indeed over for the Chinese business community. It’s no longer in vogue for either investors or entrepreneurs to be “2VC” these days.

In fact almost all businesses i know are shifting to the new mindset. We used to always try to tag ourselves along to all sorts of capital market catchphrase of the time (SaaS, ESG, AI…) in order to craft a good story so that VCs can invest. Now we don’t care about this anymore. Our actual profitability and cash flows are actually way better than before.

So, what this FT story tells is just that the old "2VC" model, which was not healthy anyway, was over, and I am not quite sure it's a bad thing either.

Also, using whether there is VC money to make a judgement about entrepreneurship in China sounds like a disgrace to me. Now, as far as the world who reads the FT article is concerned, the work, the triumphs and the anxieties of actual business owners trying very hard to cope with the challenge of our time is reduced to nothing. It seems as if we don’t exist. That our successes and failures are still to be judged by whether VC investors like us.

I apologize for being emotional here, but here is the moment I have to speak up.

[In the paid section of this article, I will go on to review the new delayed retirement policy, and a new trend I have been observing regarding the capital market in China that’s related to dividend and share repurchase.

If you are already a paying subscriber of Baiguan, please find me for complimentary access of his newsletter.]