As the high-tech stand-off between China and the US continues, start-ups in Shanghai, Hangzhou and the Pearl River Delta are once more coming into their own.
DeepSeek, which shot to top spot of the Apple Store’s downloads, shocking investors and rattling tech stocks, has put China’s start-up scene firmly back in focus, as we enter the Year of the Snake.
The artificial intelligence model quickly caught the eye of AI experts and then the rest of the world, with president Donald Trump calling it a “wake-up call” for US companies.
According to The Hurun Research Institute, Shanghai has overtaken San Francisco as the world capital for Hurun Gazelles — start-ups most likely to become $1bn ‘unicorns’ within three years. China’s capital, Beijing, ranks third and New York fourth.
DeepSeek, located 170km to the south of Shanghai in Hangzhou, has also benefited from the ecosystem, with corporations, thought leaders and the international community returning, as the coastal regions recover from the vast societal and economic impacts of the Covid-19 pandemic.
“Shanghai is a unique cosmopolitan city and financial hub in China that is open and receptive to trends and ideas from around the world,” says Victor Chao, managing director and head of private banking in north Asia at RBC Wealth Management.
“This provides a gateway for international investors to access opportunities in the Chinese market through Shanghai — a global metropolis that has a deep connection to markets across the world.”
Shanghai is also a hub for “cutting-edge technologies, including artificial intelligence, semiconductors, and biotechnology, attracting global and domestic tech companies and start-ups”, he adds.
The Shanghai Stock Exchange Science and Technology Innovation Board, also known as the STAR Market, offers a “unique” opportunity for international investors to access China’s innovation ecosystem, according to Mr Chao.
Best-laid plans
Chinese business commentators credit the structured approach of China’s planned economy as a key driver of this trend. "China, in this particular case, really does benefit from being a so-called planned economy, whereas other nations sort of rely upon market factors to drive innovation," says Charles Chang, director of the Fintech Research Center and professor of finance at Fudan University’s International School of Finance in Shanghai.
The reliance on market factors “necessitates” either the support of mega corporations that are willing to pour in billions of dollars towards innovation or require extremely “active” capital markets.
“With a planned economy, so long as the planners, in this case, the government, decides that this is what we want to do, then billions of dollars, even hundreds of billions of dollars, are at the beck and call of the planner,” says Mr Chang. He credits the same dynamic for the success of China’s textile manufacturers in the 1980s, and mobile internet several decades later, when Ali Baba, Tencent and Huawei all have benefited from a planned economy.
Ecosystems have been developed to help start-ups thrive. “The Pearl River Delta has built a massive semiconductor ecosystem, with manufacturing in Dongguan, capital outlay from Hong Kong, and consulting from Shenzhen," says Mr Chang.
China's latest push for innovation, he says, was kick-started 15 years ago, as part of a broader strategy to transition from a manufacturing-based economy to a knowledge-driven, high-tech powerhouse. This shift was driven by government policies, massive investments, and an emphasis on homegrown technology.
Shanghai has “existing advantages” in finance, capital market access and now an emerging ecosystem around the Yangtze River Delta, similar to the Pearl River Delta.
"For start-ups, it’s not just about smart, ambitious young people; they must feel welcome, supported by infrastructure, regulation easing, and even special subsidies for foreign entrepreneurs and graduates," Mr Chang explains.
He believes the city’s human talent, reliable infrastructure — including 5G, high-speed rail, and two major airports within Shanghai city limits — give an edge over US tech hubs such as San Francisco.
US-China tensions
Rather than creating unsurmountable problems, geopolitical tensions with the US have prompted China to do things differently, believes Mr Chang. "If you're talking about semiconductors, if you're talking about quantum computing, new materials, green technology, AI, these are all the things the US, under the guise of data security, has been most restrictive about,” he says.
“This has incentivised China to say: 'Well, to hell with you. I'm trying to invest domestically’.”
China has realised that in some ways, it has been up to 20 years behind the US tech hubs and that if they failed to invest domestically, this could become a permanent innovation gap.
“So maybe five years from now, we’ll only be five years behind, and maybe 10 years from now, then we will have, for all intents and purposes, sort of caught up,” he adds.
Chinese consumers are also doing things differently, suggests Mr Chang. "I use an iPhone, an Apple product," for which he has been "playfully, yet unmistakably, ridiculed" in social settings. "People will ask, ‘What generation are you living in? Why are you still using an Apple product?’" he says, as others proudly brandish Huawei devices, boasting superior cameras and AI-powered features.
Taking advantage of domestic markets is now a “more profitable play” than simply being a custom manufacturer for the US, says Mr Chang. “Part of it also is nationalism. If you don’t want to play with me, then fine. I don’t want to play with you.”
Others also see opportunities among the tensions. “China has now taken the lead in advanced technologies like biotech and semiconductors, a feat made possible by increased investment, a strong focus on research and development, and most importantly, the unwavering support of the government,” says Xuxin Mao, head of research at Bank of China. “This support, amid US-China competition, provides a stable and promising market for the years to come.”
