Transcript: China’s start-up winter is here

This is an audio transcript of the FT News Briefing podcast episode: ‘China’s start-up winter is here’

Kasia Broussalian
Good morning from the Financial Times. Today is Monday, September 16th and this is your FT News Briefing. The US Federal Reserve will decide this week whether to go big or small. And Indonesia’s palm oil industry warns that a new law to tackle deforestation will mess up supply chains. Plus, China’s venture capitalists are short on cash, leaving local entrepreneurs out of ideas.

Speaker 2
It really was clear just how grim the environment is right now for entrepreneurs. There’s almost no incentive to launch new companies in China.

Kasia Broussalian
I’m Kasia Broussalian, and here’s the news you need to start your day.

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It’s going to be a major week for central banks on both sides of the Atlantic. First up, on Wednesday, the Fed will meet to talk about interest rates. And at this point, it seems like the decision will be on how big of a cut to make instead of whether to cut at all. Investors on Friday upped their bets that we’re looking at a half point cut rather than the bank’s more typical quarter point. And then over in the UK, the Bank of England will have its own interest rate party on Thursday. Here the picture is a little more mixed. The GDP report from July came out last week, and the numbers were kind of disappointing. That’s boosted the chances of a rate cut by a bit. But for the most part, markets still expect that the BOE will hold rates steady.

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China used to be one of the best places in the world for venture capitalists to invest in start-ups. Think of a company like Alibaba. It took advantage of China’s explosive economic growth and the rise of smartphones to become big. But entrepreneurship is on the outs these days in China, and VC investment is drying up. Eleanor Olcott has been investigating the fall of the sector and she joins me now. Hey, Eleanor.

Eleanor Olcott
Hi.

Kasia Broussalian
So tell me about the environment these days for China start-up sector. I mean, just how bad is it?

Eleanor Olcott
So I started reporting this piece because I was looking into data on how many new start-ups have been founded. In 2018, that number was over 50,000. And by last year that number fell to just over 1,000. That statistic was really quite shocking to me. It really was clear just how grim the environment is right now for entrepreneurs. There’s almost no incentive to launch new companies in China.

Kasia Broussalian
Wow. Yeah, that is just an enormous decline. So what’s the reason behind it?

Eleanor Olcott
Yeah. So obviously, China’s economic slowdown is a huge factor here. But more fundamentally, what we’re seeing is a shifting nature in the way that VCs are carrying out their investments. Politics has played a really crucial role. The conservatism and debt mindset, which has kind of taken hold of this once very high-risk, go-go industry, is 100 per cent down to the anti-corruption campaign that’s been rippling through tech and finance. The state plays a big role in financing VCs, and right now, all of those players are facing intense scrutiny about where they’ve spent money, their relationships with the companies that they’ve been financing. And that’s kind of created this trickle-down effect where everyone is way too cautious to make big bets and to stick their neck out, which ultimately is kind of the spirit and at the heart of what a VC should be doing.

Kasia Broussalian
OK. So politics and the mixing of state funds with a pretty risky industry seems to be an issue here. How is that playing out more broadly?

Eleanor Olcott
One thing that everyone mentions is the lack of exits. That’s the complete dearth of IPO’s or M&A. This is really the way in which VCs return money to their investors. Beijing has increased the bar for companies going public, and that basically means that there’s the really long pipeline of companies waiting to go public. But geopolitics is also playing a huge role. One factor I didn’t mention here is the US sanctions. I spoke to a number of VCs and founders that said, you know, what is the point in launching or trying to start a high-tech company? If it’s successful, it’s just going to get sanctioned. So this is creating a huge amount of conservatism. It means that VCs are also just going for safer bets, investing in manufacturing companies, things that they think won’t attract too much scrutiny from Washington.

Kasia Broussalian
And then how significant is this slowdown in entrepreneurship and VC funding for China’s economy? I mean, if innovation is struggling to break through, what does that portend for growth in the future?

Eleanor Olcott
There are two really important impacts of this. The VCs have been critical in creating companies that have been a source of huge employment and growth in the country. The fact that this next generation of tech companies is not being financed right now is a huge issue for China, particularly when the economy is doing so badly. But more broadly, these players have been critical in financing a huge amount of Chinese technological innovation. And what we’ve seen over the past few years is these VCs have become incredibly conservative and too afraid to make these big bets on companies that are innovating and trying to create the next game-changing drug or the next high-tech company. And ultimately, that’s bad for China’s long-term tech ambitions.

Kasia Broussalian
Eleanor Olcott writes about Chinese technology for the FT. Thanks, Eleanor.

Eleanor Olcott
Thank you.

Kasia Broussalian
Federal law enforcement officials said yesterday that they were looking into a possible assassination attempt against Donald Trump. He wasn’t hurt. The former president was at his golf course in Florida on Sunday when Secret Service agents spotted a man with a gun in the bushes. The agents fired at him. Later on, local police stopped a car and took a suspect into custody. If confirmed, this would be the second assassination attempt against Trump. Just two months ago, the Republican candidate for president was speaking at an election rally in Pennsylvania when he was grazed by a bullet.

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Indonesian palm oil producers are warning that a new deforestation law from the European Union will cause chaos if it’s implemented. The law is supposed to go into effect at the end of December, and it’s meant to make sure that palm oil and its production process isn’t destroying forests, which has become a major concern.

A. Anantha Lakshmi
Environmental groups say there’s been widespread deforestation in Indonesia and Malaysia over decades to grow palm oil, and that in turn has destroyed habitats and endangered various wildlife.

Kasia Broussalian
Anantha Lakshmi is the FT’s correspondent in Jakarta and she joins me now. Hey, Anantha.

A. Anantha Lakshmi
Hi.

Kasia Broussalian
So first off, what is Indonesia’s complaint about the new EU legislation?

A. Anantha Lakshmi
So the new EU deforestation law requires that products entering the EU do not cause deforestation or any kind of forest degradation. Now, Indonesia, which is the largest producer and exporter of palm oil, says that the regulation is discriminatory and that the EU has not engaged sufficiently with the producing countries in drafting this law. And it’s not just Indonesia. Malaysia, which is another palm oil producer, the US, Latin American countries have all said that the law amounts to a trade barrier.

Kasia Broussalian
And how big of a deal is this? I mean, can you tell me a little bit about the importance of palm oil and what it’s used for?

A. Anantha Lakshmi
Sure. So palm oil is quite ubiquitous. It’s the most widely consumed edible oil in the world. It’s used in a variety of food products such as chocolate, pizza, instant noodles, ice cream. It’s also used in cosmetics like lipstick and personal care products such as soap, detergent and in the pharmaceutical industry. So all these industries that use palm oil could be hurt if supplies are disrupted.

Kasia Broussalian
Is there a sense of just how much pressure this law could put on palm oil supplies?

A. Anantha Lakshmi
So Indonesia says that up to 30 per cent of palm oil supplies into the EU could be affected. They say that supplies to the EU could drop and there could be chaos from global supply chain disruptions. This is because the law requires importers and exporters to provide evidence that the product has not been produced from deforestation. So they have to provide geolocation data for every plot of land that has contributed to a particular shipment. A Malaysian palm oil trade group told us that a single sales order for palm oil could involve getting those supplies from multiple refineries, mills and plantations across the country, which means producers and others in the supply chain will basically have to collect millions of data points for a single shipment.

Kasia Broussalian
Yeah, that sounds incredibly complicated. Which makes me wonder, is it worth it? Will the EU law actually help in the effort to curb deforestation?

A. Anantha Lakshmi
I think it’s difficult to say. For palm oil, the EU is a relatively small market compared to countries like India and China, which consume a lot more of the commodity. So compliance with the EU law alone will not stop deforestation. But sustainability is being increasingly scrutinised globally by regulators and consumers. So there could be more pressure on that front. And the producing countries themselves are also slowly implementing their own sustainability standards. So all of that together could have an impact on deforestation rates.

Kasia Broussalian
Anantha Lakshmi is the FT’s correspondent in Jakarta. Thanks, Anantha.

A. Anantha Lakshmi
Thank you.

Kasia Broussalian
You can read more on all of these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.