Artificial intelligence and cleantech interest is driving the venture capital investment in Asia, while more broadly, VC has been through a tough period in China.

Despite a challenging start to the year, China secured eight of the largest 10 venture capital deals in Asia in the first quarter of 2024, according to the latest KPMG Venture Pulse report.

China continued to show interest in advancing AI and machine learning innovation; cleantech and alternative energy – also attracted strong funding within China – where three clean techs were among the largest deals in Asia during the quarter, KPMG said in a statement.

However, while these figures gave some comfort for VCs, overall venture capital investment in China fell 30 per cent quarter on quarter to $11.5 billion. "Despite several large cleantech raises, VC investment in China fell from $15 billion in Q4 '23 to only $11.5 billion in Q1'24  - the lowest total seen since Q1’20. This number is striking, despite a tendency for Q1 to be slow in China due to the timing of Chinese New Year and companies waiting to evaluate their year end financials before making major decisions," KPMG said. 

Higher interest rates, geopolitical strains and deteriorating US-China trade relationships have created problems for China in recent years. 

"Transition" technology appears to be a bright spot in today's challenging VC market.

In parallel, a new report by Swiss private bank Lombard Odier shows that China is taking a leading role in a range of transition technologies. China accounted for 38 per cent of this transition total, well ahead of investments in Europe and the US at 19 per cent and 17 per cent respectively. China has built a dominant position in the hardware part of the energy transition. The cost structure of Chinese leaders in the field is very difficult to compete with, Lombard Odier added. See more commentary here.

According to KPMG, VC-backed companies in Asia raised $18.9 billion across 2,305 deals. The top three largest VC deals in Asia came from China, including a $1.1 billion deal by the electric vehicle company IM Motors, a $1 billion deal by AI-focused YueZhi AnMian, and a $940 million deal by Yuanxin Satellite. 

AI and new energy continued to be the most attractive sectors for investment in China, including subsectors such as new materials for manufacturing to support new energy activities, KPMG said. China accounted for four of the world’s new cleantech and alternative energy-focused unicorns in the first quarter – Sungrow NewEnergy, Guangxi CNGR New Energy, Zhizi Auto, and Qiyuan Green Power.

“In China, we have witnessed significant development in the electric vehicle sector, especially in the passenger vehicle market,” Zoe Shi, partner at KPMG China, said. “Currently, there is a growing interest in electric vehicle trucks due to China‘s vast industrial market and the extensive use of trucks for industrial transportation. However, further progress is required to fully expand this sector, from an energy-related aspect of development and exploring new materials to support industrial vehicles."

Despite the difficult start to the year, the Hong Kong government is continuing to support research and development to drive the commercialisation of research outcomes, nurture local startups, and boost collaboration with sister cities in the Greater Bay Area, KPMG continued. Companies from mainland China and the US which are involved in life and health technology, AI and data science, fintech, advanced manufacturing and new energy, have committed to setting up R&D centres or regional offices in Hong Kong, via the Office of Attracting Strategic Enterprises (OASES), to invest more than $5 billion, creating over 13,000 jobs in the coming years. These companies will boost the startup ecosystem, KPMG added.

Looking ahead to the second quarter of 2024, VC investment in Asia is anticipated to remain stable, with the consumer market expected to recover gradually, the firm said. AI and ESG-related technologies, including battery technologies, the electric vehicle value chain, and semiconductors, are projected to continue drawing significant investments. China expects that potential government policies aimed at boosting economic confidence could enhance VC investor sentiment in the latter half of 2024, should the policies materialise.