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China's slowdown freezes mega deals in third quarter as venture capitalists watch trade war, Hong Kong protests unfold

Enoch Yiuenoch.yiu@scmp.com

Venture capital deals in Asia-Pacific fell by a fifth in the third quarter as a slowdown in China's economy kept investors away from mega deals, while anti-government protests clouded fundraising prospects in Hong Kong amid recession. The total value of transactions dropped to US$14.92 billion from US$18.61 billion in the preceding quarter, according to data published on Monday by KPMG. The consulting firm attributed the lower volume to the slowdown caused by the ongoing US-China trade war. That drop is steeper than the 14 per cent decline in overall global transactions, to US$55.71 billion.

Seven of the 10 deals in the region involved mainland Chinese companies while Indian start-ups made up the rest, according to KPMG. None, though, surpassed the billion-dollar mark compared with four the first six months this year.

"There is a lot of interest in the Asian market but investors have really slowed down their activity," said Egidio Zarrella, partner and head of clients and innovation at KPMG China. "They are being conservative, waiting to see where things go from an economic and geopolitical perspective."

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The world' second-largest economy grew by 6 per cent last quarter, the slowest since records began in March 1992. The bruising tit-for-tat trade war with the US has forced some global manufacturers to relocate their factories elsewhere, causing its engine of growth to cool in the past six months. In Hong Kong, anti-government protests pushed the local economy into a recession last quarter, while stocks slumped the most in four years.

The largest transaction last quarter involved e-commerce giant Alibaba Group Holding, which teamed up with private equity firm Yunfeng Capital to invest US$700 million for a minority stake in NetEase Cloud Music. The music streaming service has about 132 million monthly active users, the fifth largest in the business. Alibaba owns The South China Morning Post.

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Toyota Motor invested US$600 million in Chinese ride-hailing entity Didi Chuxing, while Chinese electric vehicle maker CHJ Automotive got US$530 million from its latest round of fundraising. Chinese electric carmaker Byton received U$500 million while Indian software developer Ola completed the top five list with its US$490 million funding.

A Baidu sign is seen at the World Internet Conference in Wuzhen, Zhejiang province in October: Photo: Reuters alt=A Baidu sign is seen at the World Internet Conference in Wuzhen, Zhejiang province in October: Photo: Reuters

There were two billion-dollar deals in each of the previous two quarters, involving Singapore-based ride hailing firm Grab (US$4.5 billion), Chinese software company Chehaoduo (US$1.5 billion), OYO Rooms from India (US$1.1 billion) and Beijing-based JD Health (US$1 billion), according to KPMG data.

Venture capital investment in Asia is expected to remain moderate at best in the final quarter this year, particularly in China where the economic and geopolitical tensions are expected to continue, said Irene Chu, partner and head of new economy and life science at KPMG in Hong Kong. "China's central government is not standing still, however," she said. "It is forging ahead with policy reforms aimed at improving and modernising regulations for a wide range of industries, including insurance, finance, capital markets, and health care."

These changes are likely to have a positive effect on the venture capital industry in China, Chu added. "The pipeline of companies applying for IPOs in Hong Kong is still very strong, but whether they will go out before the end of the year will depend on changing market conditions."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.