CNBC’s The China Connection newsletter: From Didi to DeepSeek

This report is from this week’s CNBC’s The China Connection newsletter, which brings you insights and analysis on what’s driving the world’s second-largest economy. Each week, we’ll explore the biggest business stories in China, give a lowdown on market moves and help you set up for the week ahead. Like what you see? You can subscribe here.

It’s a result of DeepSeek’s AI disruption, coupled with a buoyant Hong Kong IPO market on track to surpass Wall Street this year as the world’s largest by money raised. Beijing’s signals to support businesses in recent months have also helped.

The Hang Seng Index’s surge of over 20% so far this year reflects near-term optimism. Another sign comes from word of Chinese venture capital firms raising U.S. dollar-denominated funds again, after a dry spell in which the VCs had to turn to local investors with Chinese yuan funds.

Beijing-based BAI Capital said it started raising for a new $800 million fund in February and plans to close the initial round in September. The firm is supported by German global media conglomerate Bertelsmann Group.

BAI said it’s seen “strong interest” for the U.S. dollar-denominated fund, which it will then use to invest in China-based companies. To date, the firm has already invested in 10 companies that plan to go public in the next one to two years.

Future Capital Discovery Fund, an early backer of high-flying electric car startup Li Auto, told me it raised a record $210 million for a U.S. dollar-denominated flagship fund in the second half of last year.

“Once there is a fundraising window, we must quickly seize the opportunity to raise funds,” Mingming Huang, founding partner at Beijing-based Future Capital, said in Chinese, translated by CNBC. “This is very different from the long-standing practice of raising U.S. dollars from the market every few years.”

“Now we need to be very sensitive to macro trends, especially the direction of relations between major economies,” he said. The firm, which counts investors including sovereign wealth funds and endowments from the Middle East, U.S., Europe, Japan and Southeast Asia, has plans to deploy capital for AI agents and hardware.

But it’s been a tough few years for China VCs and their limited partners.

In the VC world, a firm raises money from a range of “limited partners,” which include sovereign wealth funds, pension funds, university endowments and family offices. While getting paid to manage the fund, the VC then chooses startups to back, reaping a reward from the companies’ IPOs that is shared with the limited partners.

The fallout around Chinese ride-hailing company Didi’s New York IPO in June 2021, on the eve of the ruling Chinese Communist Party’s 100^th anniversary – despite multiple warnings from Beijing about data privacy breaches – did not sit well with regulators on both sides of the ocean. Didi was backed by a long list of prominent investors across numerous funding rounds, including ,  and Sequoia Capital.

China would later raise the bar for its companies wanting to list overseas, while Washington ramped up its scrutiny of U.S. capital heading to China, dampening fundraising activity on the mainland, particularly for cross-border investments.

Notably, Sequoia Capital China split off from its U.S. parent in 2023 and rebranded under HSG. It did not respond to a request for comment about their latest U.S. dollar fundraising plans. Other VCs that have spun off or restructured their China arms include GGV Capital, which became Granite Asia, and California-based Matrix, which rebranded its Chinese operations as MPCi last year.