As China Sees a Covid Surge and Buckling Economy, How Will It Affect Startups?

Covid is devastating China’s economy: Lockdowns and protests have crippled businesses and further loosened the country’s hold on global manufacturing. One example is recent problems at Apple’s factory in the city of Zhengzhou, which led to an immense loss for the tech giant and plans to move production away from China. Additionally, the geopolitical situation and evolving domestic policy are also impacting startups.

The damage has been widespread. The covid restrictions hurt businesses of all sizes, but it was especially harsh for those without the capital to support themselves in the face of unpredictable lockdowns. And while many thought it would improve as the restrictions loosened, a surge in covid cases has seen things decline once more.

Retail has been hit particularly hard. In November, retail sales were 5.9% lower than last year, which was worse than the 3.7% expected. Industrial production also saw a smaller amount of growth than the expected 3.6%, only reaching 2.2% from a year ago.

• In particular, luxury goods have been impacted greatly, with Bloomberg Intelligence estimating that the market could have halved in 2022.
• China is a massive chunk of the luxury market, so brands have to remain despite the domestic situation, which is tough for luxury brand startups.

The property sector took a massive hit. Investments in the property sector are a major chunk of China’s GDP, rising as high as 30%. However, investments shot down by nearly 10% this year, with a decrease in property sales value of over 26% also being observed. Proptech and real estate startups have already been hurting, and it is only getting worse.

China is shifting its efforts to the domestic economy. Covid and lockdowns have hurt China’s economy, but the global economic situation has also played a major role. In response, China announced plans to focus its efforts domestically, expanding consumption and investment to combat economic struggles and lower external demand.

It is yet to be seen how quickly this plan will be put into action and whether startups, both foreign and domestic, will be heavily impacted. However, there is a distant vision, with the aim being to boost consumption and investment to a new place by 2035, so things might occur gradually.

Global tensions are another factor potentially affecting funding and perception for startups. It is particularly fragile now, with the Chinese government’s aggressiveness toward the West and ties with Moscow leaving many nervous.

• Some investors are hesitant to invest in Chinese startups for fear of being on the wrong side of things.
• Chinese investors and startups looking to expand into foreign markets have to consider the global situation.

The geopolitical situation also directly affects companies, including startups, as competition between countries intensifies. The current chip war between the US and China is a prime example.

Where does that leave startups? There is a lot going against startups right now, and Chinese startups are no exception. There is less funding to go around, an issue seen globally, and the covid policies have disrupted trade and transit in China for quite some time. Moreover, with covid cases rising and geopolitical turmoil, stability might take some time to return, and that is time not all startups have.