Commentary on Political Economy

Saturday 16 March 2024


Americans Invested Billions in Chinese Companies. Now Their Money Is Stuck.

TikTok’s turn in geopolitical cross hairs highlights the narrowing paths to liquidity for investments in Chinese companies.

Shou Zi Chew, wearing a blue suit, is walking next to a building. He is surrounded by three men wearing gray suits.
Shou Zi Chew, right, the chief executive of TikTok, on Capitol Hill on Thursday.Credit...Kent Nishimura for The New York Times

When investors talk about “zombie” companies, they’re usually referring to distressed start-ups that are hobbling along, unable to grow and unlikely to ever return the money they’ve raised.

But as deal makers feverishly debated efforts this week by lawmakers to force TikTok’s Chinese parent company, ByteDance, to sell the app, they talked about a new version: China zombies.

China zombies may have booming businesses, but they’re unlikely to provide investors with any immediate return because they’re stuck in geopolitical cross hairs.

It’s not just the investors in ByteDance who, after handing it more than $8 billion, are stuck. What looked like a mammoth growth opportunity just a few years ago — inspiring investors to pour money into companies like Ant Financial, PingPong and Geekplus — has turned hostile.

“There’s more out there like ByteDance,” Evan Chuck, a partner at the advisory firm Crowell, said of companies with investors who may find themselves in this position. “It’s only really heating up further.”

Selling is increasingly a long shot. Take TikTok. Even if ByteDance puts the app up for sale, the Chinese government is unlikely to allow the company’s most valuable asset, its recommendation algorithm, to be included. The country introduced new export control rules for technologies like that algorithm in 2020, just as TikTok was nearing a deal with U.S. buyers (which eventually fell apart).

Jonathan Knee, a professor at Columbia Business School and an adviser at the investment bank Evercore, said any company that acquired TikTok would most likely own the brand but not the underlying software and algorithms. He compared buying TikTok without its algorithm to buying Hulu without the rights to its content. “It’s not completely clear what you’re buying,” he said.

Many other Chinese tech companies would face similar hurdles if they tried to sell to a U.S. buyer. And China’s slowing economy has depressed company valuations, making a sale there unappealing to investors. The number of Chinese companies that were acquired last year, 3,151, was half the total of 6,341 in 2019, according to the financial data company Dealogic.

I.P.O.s have become tricky. Few Chinese companies have listed in the United States since the ride-hailing giant Didi delisted its shares on the New York Stock Exchange amid a crackdown by Chinese regulators just months after its initial public offering in 2021. The number of Chinese start-ups listing their shares on U.S. exchanges dropped from around 18 annually between 2018 and 2021 to just three in 2022, according to PitchBook, which tracks start-ups.

Listings on China’s exchanges are also facing increased scrutiny. The country’s market regulator vowed this week to tighten oversight on companies listing domestically, given the collapse of the Chinese stock market.

Billions of dollars are at stake. As recently as 2021, venture investors were pouring nearly $47 billion into Chinese companies, according to PitchBook. It’s not just venture capital at risk. U.S. public pensions and university endowments invested about $146 billion from 2018 to 2022, according to Future Union, an advocacy group focused on exploring U.S. investments abroad.

But there’s little incentive for a quick sale to a local partner while under duress. “At the end of the day, there’s going to have to be some exit opportunity — the question is timing,” said Andrew King, who wrote the Future Union report. And given the high returns that investors in companies like ByteDance might get without geopolitical pressure, he added, “they’re not likely to want to take a shortcut path.”

Investors have other routes to liquidity, like borrowing against their investment. Investors could also wait until the relationship between China and the United States improves, or bet that China values the capital infusion that a large deal could provide more than geopolitics.

But mostly, Jonathan Rouner, the head of international mergers and acquisitions at Nomura, told DealBook, “their hands are tied.” — Lauren Hirsch

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