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

There's a murmur of excitement successful China's task superior circles these days: overseas investors are starting to instrumentality with U.S. dollars.

It's a effect of DeepSeek's AI disruption, coupled with a buoyant Hong Kong IPO market connected way to surpass Wall Street this twelvemonth arsenic the world's largest by wealth raised. Beijing's signals to enactment businesses successful caller months person besides helped.

The Hang Seng Index's surge of implicit 20% truthful acold this twelvemonth reflects near-term optimism. Another motion comes from connection of Chinese task superior firms raising U.S. dollar-denominated funds again, after a adust spell successful which the VCs had to turn to section investors with Chinese yuan funds.

Beijing-based BAI Capital said it started raising for a caller $800 cardinal money successful February and plans to adjacent the archetypal circular successful September. The steadfast is supported by German planetary media conglomerate Bertelsmann Group.

BAI said it's seen "strong interest" for the U.S. dollar-denominated fund, which it volition past usage to put successful China-based companies. To date, the steadfast has already invested successful 10 companies that program to spell nationalist successful the adjacent 1 to 2 years.

Future Capital Discovery Fund, an aboriginal backer of high-flying electrical car startup Li Auto, told maine it raised a grounds $210 cardinal for a U.S. dollar-denominated flagship money successful the 2nd fractional of past year.

"Once determination is simply a fundraising window, we indispensable rapidly prehend the accidental to rise funds," Mingming Huang, founding spouse astatine Beijing-based Future Capital, said successful Chinese, translated by CNBC. "This is precise antithetic from the long-standing signifier of raising U.S. dollars from the marketplace each fewer years."

"Now we request to beryllium precise delicate to macro trends, particularly the absorption of relations betwixt large economies," helium said. The firm, which counts investors including sovereign wealthiness funds and endowments from the Middle East, U.S., Europe, Japan and Southeast Asia, has plans to deploy superior for AI agents and hardware.

But it's been a pugnacious fewer years for China VCs and their constricted partners.

In the VC world, a steadfast raises wealth from a scope of "limited partners," which see sovereign wealthiness funds, pension funds, assemblage endowments and household offices. While getting paid to negociate the fund, the VC past chooses startups to back, reaping a reward from the companies' IPOs that is shared with the constricted partners.

The fallout astir Chinese ride-hailing institution Didi's New York IPO in June 2021, connected the eve of the ruling Chinese Communist Party's 100^th day – contempt aggregate warnings from Beijing astir information privateness breaches – did not beryllium good with regulators connected some sides of the ocean. Didi was backed by a agelong database of salient investors crossed galore backing rounds, including ,  and Sequoia Capital.

China would aboriginal rise the barroom for its companies wanting to database overseas, portion Washington ramped up its scrutiny of U.S. superior heading to China, dampening fundraising enactment connected the mainland, peculiarly for cross-border investments.

Notably, Sequoia Capital China split off from its U.S. genitor successful 2023 and rebranded nether HSG. It did not respond to a petition for remark astir their latest U.S. dollar fundraising plans. Other VCs that person spun disconnected oregon restructured their China arms see GGV Capital, which became Granite Asia, and California-based Matrix, which rebranded its Chinese operations arsenic MPCi past year.

Not everything is the aforesaid arsenic it was successful the pre-Didi IPO years.

Rather than giving wealth to a task superior firm, galore constricted partners based successful Europe, the Middle East and Asia similar to straight bargain ownership stakes successful private companies specified arsenic Chinese net giants ByteDance and Xiaohongshu, said Hope Xu, a task capitalist. She left Source Code Capital past twelvemonth to commencement her ain firm, called Density 590, focusing connected specified deals, known arsenic secondaries, which see single-asset income and stakes successful funds.

Even though the Beijing-based TikTok genitor isn't publically listed, the request for its shares is truthful precocious that they are fundamentally arsenic casual to liquidate, oregon sell, arsenic they would beryllium connected a publically listed exchange, she said. While the sellers thin to mostly travel from the U.S. and Asia, Xu said the buyers typically travel from the EU, the Middle East oregon Asia.

It's a large accidental for returns.

ByteDance's valuation has surged from $245 cardinal astatine the commencement of this twelvemonth to $340 billion, she said Tuesday, noting that investors are starting to judge the uncertainty of the U.S.-TikTok divestiture.

ByteDance declined to remark connected its valuation.

The institution has go a quiescent unit successful China's net realm. Besides owning a fashionable Chinese TikTok equivalent called Douyin — which surpassed JD.com last twelvemonth to become the second-largest ecommerce level by gross income — ByteDance has besides developed a fashionable AI chatbot called Doubao, on with an AI cause level named Coze.

Xu pointed retired that for tech investments specified arsenic AI and robotics, the resources and superior needed are vast, making it hard for smaller startups. Buying a involvement successful a large company, such arsenic ByteDance, with its divers merchandise lines, is fundamentally similar buying an AI exchange-traded fund, she said.

For example, Tencent is not lone processing its ain AI models and applications, but besides investing successful AI startups. It reported a astir five-fold surge successful profits from its concern associates and associated ventures past year, rising from 5.8 cardinal yuan to 25.2 cardinal yuan implicit 12 months, according to the company's yearly report.

The China VC satellite is besides nary longer conscionable focused connected the home market.

Citing the macroeconomic situation and tech trends, BAI Capital said its investments volition beryllium divided betwixt section and overseas startups. Half of its funds volition spell towards China-based companies looking to grow worldwide successful fintech, entertainment, AI and proviso chains, portion the different fractional of its funds volition absorption connected consumer, healthcare and exertion opportunities successful China, BAI said.

Since 2019, BAI said it has invested successful aggregate rounds successful Stori, a integer slope successful Mexico with 3.6 cardinal recognition paper users and 2.4 cardinal depositors. "We judge Stori's occurrence is not an isolated case."

The question is however agelong these VCs and their constricted partners tin stay enthused. The Hong Kong Stock Exchange past week proudly announced its busiest time for IPOs and ETF launches to date: with six gongs connected stage. 

Mainland China and Hong Kong stocks are mixed connected Wednesday amid mixed trading successful the region, arsenic investors assessed U.S. President Donald Trump's connection of having reached a preliminary commercialized woody with Indonesia.

Mainland China's CSI 300 was down 0.35%, portion Hong Kong's Hang Seng Index — which includes large Chinese companies — had gained 0.15% arsenic of 1:12 p.m. section time. The mainland benchmark is up astir 1.8% twelvemonth to date, information from LSEG showed.

The show of the Shanghai Composite implicit the past year.