By Clay Chandler and Eamon Barrett
March 16, 2019

Last August, in my first post for Adam’s Data Sheet newsletter, I warned that Chinese tech companies might be headed for a “capital winter.” Alas, that dire prediction appears to be coming true.

The Economist, citing research by CB Insights, noted last week that, in the last three months of 2018, deals to commit venture capital to Chinese startups slumped in number by two-fifths, while private-equity financing dropped by more than a quarter, to under $10 billion compared to the previous three months.

Yesterday, the South China Morning Post, citing research by Boston-based management consultancy Bain & Company, warned that China’s internet and technology sector is a “bubble waiting to burst.” In 2018, private equity firms invested more than $59 billion in Chinese internet and technology startups, according to Bain, accounting for more than 70% of total deal value for the sector in the Asia Pacific region. Bain says private equity investors paid high multiples to secure stakes in Chinese tech companies that have earned poor returns—and predicts that exiting from those investments will now prove extremely difficult.

As it gets harder to raise money from venture investors, many Chinese tech startups are hoping to raise capital by listing shares on public exchanges. But the long queue of firms seeking public exit, and the dismal performance of last year’s China tech IPOs, has dampened the appetite of retail investors.

Even established firms like Baidu, Alibaba and Tencent have announced restructuring plans in recent months. Meanwhile, younger ventures, including Didi Chuxing, Xiaomi, and Meituan Dianping, are slashing bonuses and laying off staff. On Friday, Mobike, a once high-flying bike-sharing concern that raised billions in venture funding, said it will close all international operations to focus on China.

The travails of China’s tech ventures come as many Western analysts have turned bullish on the broader market for China shares. In November, Goldman Sachs and Morgan Stanley both predicted a rally for China stocks. In the months that followed, foreign investors piled into Chinese equities. The Morgan Stanley Capital International index, a leading benchmark for billions of dollars worth of global stock funds, recently announced that it plans to quadruple the representation of China stocks in its global portfolio.

That enthusiasm is hard to square with a flurry of recent reports suggesting the rapid deceleration of China’s economy. An analysis by Chang-Tai Hsieh of the University of Chicago and three co-authors from the Chinese University of Hong Kong made headlines earlier this month with its finding that China’s industrial output has been consistently exaggerated. The study concludes China’s GDP growth has been overstated by two percentage points on average every year from 2008 to 2016, inflating the size of China’s economy by 16%, or more than $1.5 trillion.

Looming over all the prognosticating: the uncertain outcome of U.S.-China trade talks. Bloomberg reports it’s unlikely President Trump will meet with Chinese president Xi Jinping this month. Former Trump economic adviser Gary Cohn says his ex-boss is “desperate for a deal.” But Trump himself insists he is in “no rush” to sign an agreement with China and, if Beijing won’t meet his terms, is more than willing to “walk away.”

More China news below.

Clay Chandler
@claychandler
clay.chandler@fortune.com

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