CHINA went through a five-year surge in venture capital investment that fostered a new generation of startups from ride-hailing giant Didi Chuxing to TikTok-parent Bytedance Ltd. Now the boom may be over.

Venture deals in China plummeted in the second quarter of the year as investors pulled back amid unpredictable trade talks and growing concerns about startup valuations. The value of investments in the country tumbled 77 percent to US$9.4 billion in the second quarter from a year earlier, while the number of deals roughly halved to 692, according to the market research firm Preqin.

The second quarter of 2018 marked the peak for China venture deals with a total of US$41.3 billion invested. That included a US$14 billion round for digital payments giant Ant Financial, US$3 billion for e-commerce upstart Pinduoduo Inc. and US$1.9 billion for truck-sharing service Manbang Group, known also as Full Truck Alliance Group.

By comparison, the largest venture deal in the second quarter of 2019 was a US$1 billion investment in JD Health, the health-care affiliate of e-commerce provider JD.com Inc.

China has never been through a widespread bust like the United States did after the dotcom boom, in part because the country’s venture market is so new. Years of steady growth in tech investments resulted in predictable — and enormous — profits. Whether the current downturn becomes a painful crash depends in large part on how VCs, entrepreneurs and regulators navigate terrain they’ve never seen before.

“We’re seeing real stress in the system for the first time,” said Gary Rieschel, a founding partner at Qiming Venture Partners who has worked in China and the United States. “We have never seen a downturn in the China market. For 20 years, it’s been pretty much up and to the right.”

China’s venture boom began in 2014 when Alibaba Group Holding Ltd. went public in the largest-ever initial public offering, making clear to investors the potential riches in the world’s most populous country. Venture deals tripled that year to more than US$17 billion and proceeded to rise every year through 2018 when the total topped US$105 billion, almost as much as in the United States.

Along the way, firms like Qiming, Sequoia China, Tiger Global Management and SoftBank Group Corp. fostered some of the most valuable startups in the world. Bytedance, the force behind short-video app TikTok and other addictive services, sports a valuation of US$75 billion, the highest anywhere according to CB Insights.

Didi, the ride-hailing service that ousted Uber Technologies Inc. from China, was last valued at US$56 billion, the second highest.

The trade tension gives investors one more reason for caution. Valuations had already grown vertiginous. High-profile startups such as smartphone maker Xiaomi Corp. and delivery giant Meituan Dianping saw their stocks tumble after they went public, reinforcing the impression that private market valuations had gotten out of hand.

So-called sharing economy startups have also tested the patience of their investors. Companies like Didi, Meituan and bike-sharing provider Ofo blitzed the market with heavy subsidies to grab market share from rivals, making up for their losses with venture money. Now there’s skepticism that many such companies will ever turn a profit.

“You’re really reaching the end of the shared economy — this idea of let’s give away services for free and make up for it in volume,” Rieschel said. “Some companies — Didi is the classic case — are just not showing any ability to become profitable.”(SD-Agencies)