WSJ What’s News - Beijing Steps In to Fund Chinese Tech Startups

Episode Date: October 14, 2024

A.M. Edition for Oct. 14. A sharp drop in venture-capital funding is leading the Chinese government to get more involved in grooming the country’s tech industry. The WSJ’s Liza Lin says that in the long run, that strategy could handicap China’s efforts to catch up with Western advances. Plus, a drone launched by Hezbollah hits a military base, highlighting a weak spot in Israel’s air-defense systems. And, most economists surveyed by WSJ think inflation would be higher under the policies of Donald Trump than those of Kamala Harris. Luke Vargas hosts. Sign up for the WSJ’s free What’s News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Snakes, zombies, public speaking, the list of fears is endless. But the real danger is in your hand when you're behind the wheel. Distracted driving is what's really scary and even deadly. Eyes forward, don't drive distracted. Brought to you by NHTSA and the Ad Council. The U.S. sends an anti-missile system and American troops to Israel. Plus why a booster rocket's gentle touchdown marks an engineering milestone for SpaceX. And as foreign VC funding dries up,

Beijing grabs its checkbook to support Chinese tech startups. I would describe it as a national call by the Chinese government to support the industry in a time of need. It's Monday, October 14th. I'm Luke Vargas for the Wall Street Journal and here is the AM edition of What's News, the top headlines and business stories moving your world today.

The Biden administration is sending an advanced THAAD anti-missile system to Israel, along with American troops to operate it. The U.S. Army-operated system is typically crewed by nearly a hundred soldiers and saw its first successful use in combat in early 2022, when one purchased by the United Arab Emirates intercepted a Houthi missile. U.S. officials say the deployment will augment Israel's defenses against a sizable Iranian missile threat and give the U.S. more flexibility in deploying its ballistic missile defense destroyers.

The move comes after U.S. officials held extensive talks with Israel over the country's expected military response to Iran and how Tehran might retaliate. The Biden administration didn't say when the FAD system will be in place. Separately, the Israeli military says that four of its soldiers were killed last night after a drone launched by Hezbollah hit a military base in central Israel. It was the deadliest-ever Hezbollah drone attack, highlighting a weak spot for Israel's air defenses, given that the drone didn't set off warning signs in advance. Meanwhile, Israel finds itself in an escalating dispute with the United Nations after the UN said

that peacekeepers situated at the Lebanon-Israel border were injured by Israel last week. Journal correspondent Dov Lieber in Tel Aviv has the latest. We've seen several incidents over recent days where United Nations peacekeepers belonging to an agency called UNIFIL, which is supposed to keep the peace in southern Lebanon, have been injured by Israeli soldiers. And it's part of an evolving story between Israel and the United Nations over the past year in which Israel has accused United Nations agency in Gaza of deciding too much with Hamas in Lebanon, not keeping its mandate from preventing Hezbollah from arming on Israel's border.

Now, UNIFIL says that it records any incidents of Hezbollah trying to arm on the border. That includes digging tunnels or creating other kinds of military installations, but it doesn't necessarily find everything. Yesterday we heard Israeli Prime Minister Benjamin Netanyahu saying publicly that he's asking UNIFIL to leave the areas where there's fighting between Israel and Hezbollah. Mr. Secretary General, get the UNIFIL forces out of Homs way. It should be done right now, immediately. UNIFIL is saying, we're not going anywhere.

We have a mandate from the United Nations to be here and to keep the peace. So it looks like this tension will continue into the coming days as both sides are digging in and not giving up any ground. The latest Wall Street Journal survey of economists has found that more than two-thirds of those surveyed believe inflation would be higher under the policies of former President Donald Trump than those of Vice President Kamala Harris. That echoes the results of an earlier July survey in which 56 percent of respondents said that prices would rise faster under Trump than President Biden, who was still the Democratic

candidate at the time. Since then, Trump has pledged across-the-board tariffs of 10 to 20 percent on imported goods, up from an earlier 10 percent plan, in addition to proposing a 60 percent or higher tariff on imports from China. Over the weekend, Elon Musk's SpaceX showed progress in making core components of its Starship missions reusable. The company's Super Heavy Booster, the first stage of the Starship vehicle, lifted off from South Texas yesterday morning, propelling Starship into space.

And shortly after the launch, the booster was guided back down toward the launch pad before being gently caught by mechanical arms. It was the first attempt at the catch by SpaceX, a feat that Musk has said is key to reducing the cost of rocket launches. SpaceX has said it wants the Starship spacecraft, which would carry satellites or astronauts on operational flights, to be reusable as well. Starbucks is pulling back on promotions and discounts. According to our exclusive reporting, Starbucks has been quietly winding down a range of discounts

that it had offered for long stretches of the past year, in early move by new CEO Brian Nicol to reposition the company and emphasize its image as a premium coffee chain. Like many other businesses, Starbucks has leaned heavily into discounts to win back customers after years of raising menu prices. The company has seen a drop in business in the US and China, and has cut its sales expectations twice this year. And in news moving markets to date, China has kept the world guessing on the size of its planned fiscal stimulus.

Speaking at a highly anticipated news conference on Saturday, the country's finance minister didn't say exactly how much Beijing plans to pour into the economy. He did, however, outline a laundry list of high-priority challenges that he vowed to tackle, signaling he'd spend some $300 billion of funds that have been earmarked for this year but haven't yet been deployed. The stock market reaction was mixed, with the Shanghai Composite rising today, while stocks in Hong Kong edged lower. Oil prices also slipped this morning amid persistent concerns over the demand outlook

in China. And coming up with fewer venture capital dollars being spent in China, we'll look at the government's growing role in backing tech startups after the break. Beijing is taking an increasingly prominent role in funding Chinese tech startups, stepping in to fill a gap left by private venture capital money, which has dried up as investors steer clear of geopolitical tensions. And to help us figure out what that means for the future of China's tech sector, our Ashar Sukri spoke to Journal China Tech reporter Lisa Lin. Lisa, as recently as just a few years ago, Chinese tech looked like it was pulling ahead

of the U.S. You report that in 2021, venture capital invested $42 billion and struck thousands of deals in China with many startups becoming unicorns. Just how dramatically has the picture changed since then? That's right. 2021 was a bumper year for Chinese tech startups and fast forward to 2024. What we saw from the data as of October is a lot of that money has been drying up. What we saw is this year, $6.5 billion has been pumped into Chinese tech startups. And that really is a fraction of what went into the industry in 2021. Over the last three years, what we've seen is an uptake of geopolitical tension between

the US and China and US investors, which made up the bulk of foreign capital into China in the past. A lot of them are staying on the edges. China's economy is also sluggish. And perhaps most importantly, what's really keeping investors away is the lack of an exit strategy for a lot of these startups. Because in China right now, the Chinese regulator has pretty much paused IPO's.

Lisa, so just from Beijing's point of view, how big of a problem do they see this as? So the Chinese government realizes it's a huge problem and they're taking steps to address it. One of the biggest moves they're making is to get local governments to pull their funds together and pump money into Chinese tech. So essentially what the Chinese government is doing is it's supporting its own innovation in the country.

We spoke to many investors when we were working on this piece and several of them said that state funds actually form the bulk of the money that they're managing right now and putting into the Chinese tech startup industry. Beyond that, what we're seeing is the large Chinese banks, which are mostly state owned, starting to dole out more loans to tech startups. And tech startups is really a space that historically in the past, these banks had absolutely no interest in dealing with because it's a much riskier space and they were much happier dishing out loans to the more established bigger players. And as Beijing takes on this bigger role in the tech sector, how is that going to

affect its efforts to catch up with the West? Yes, that's a good question and I think the jury is still out. However, over the past decade, China has been pumping tens of billions of dollars into propping up its semiconductor industry. If you look at the past record that the Chinese government has, success is not guaranteed. China's chip industry is still lagging behind its global peers. The other thing that's really hindering this effort is the fact that state investors and private investors have very, very different investment priorities. Because state investors like stability, they don't like risk, they want to cut their losses and that's not the type of investor you need if you're backing a

moonshot company. The AI space is a good one to look at because it really shows you how state intervention can hinder the development of innovation. When you want to develop AI models, you want to train the AI models with the best data. However, in China, AI startups are training their models on data that has to be approved first by the Chinese Communist Party, and that means the data that they use actually has to align with the goals and priorities of the Chinese Communist Party, which can be in some cases very revisionist.

And that has led to AI models that make it very difficult to expand in the West. Luke Farkas That was The Journal's China Tech reporter, Lisa Lin. Lisa, thank you very much indeed for your time. Lisa Lin Thank you for having me. Luke Farkas And that's it for What's News for Monday morning. Today's show was produced by Daniel Bach and Kate Bulevent with supervising producer Christina Rocca. And I'm Luke Vargas for The Wall Street Journal. We will be back tonight with a new show. Until then, thanks for listening.