China’s crackdown on ride-hailing giant Didi just days after its New York listing has shaken global confidence in the Chinese technology sector and raised questions about the future of foreign investment in the country’s startups.

Now that China has grown wealthy and is deploying vast sums of venture capital, it’s often forgotten that foreign investors, particularly those in the U.S., largely funded and incubated the first wave of Chinese tech firms. Among the most successful of these angels is Gary Rieschel, the founding managing partner of Qiming Venture Partners, which has invested college endowment funds in a number of Chinese unicorns, including Xiaomi, Meituan Dianping and WeDoctor Group.

Rieschel is a Bloomberg New Economy Forum delegate, and I caught up with him this week to get his take on the whole Didi fiasco, and the collateral damage it may cause for China’s stock markets.

This Week in the New Economy

• White House issues an advisory on doing business in Hong Kong.
• Violence following Zuma’s jailing eases as South Africa cleans up.
• Billionaire Ambani buys stake in India e-commerce firm Just Dial.
• Sudan plans a $640 million revamp of its shattered rail network.
• Istanbul’s new airport, the world’s largest, just did a huge debt deal. 

Andrew Browne: Gary, what’s really going on here? The China Cyberspace Administration seems to have muscled out the China Security Regulatory Commission [CSRC] when it comes to overseeing offshore listings.

Gary Rieschel: Well, this is another example of political infighting in Beijing. The Cyberspace administration that now supposedly is overseeing tech companies and whether they can list—they don’t have the same market sensitivity. If you look back over the last 12 months, there was an effort to actually have some of the companies in China that were applying for the [Shanghai Stock Exchange] restructured to list in Hong Kong or overseas, because the CSRC fundamentally doesn’t believe that the Chinese market could absorb the number of companies that would be coming to the exchange. Suddenly, the Cyberspace administration has thrown that out and said, “Well, we don’t really care about that. We’re going to force everything to list in Hong Kong and China.” When you look at the history of the Chinese stock markets, it’s not one of increasing maturity, increasing sophistication. It’s had whipsaws back and forth over the last two decades. And they run risk of losing even more trust in that stock exchange, and I think that’s catastrophic for China.

Browne: The Cyberspace administration started off as a regulatory body to clean up the internet—it had an overtly political mandate. Now it’s taken on a capital markets function. Is there a conflict here?

Rieschel: I would expect that over some time, they’ll realize that the people in charge of the listing process in China at CSRC actually do have some idea of what they’re doing. And there needs to be some consistency over a long period of time. And if indeed you’re going to have these political, bureaucratic interventions every several years, what that does is it just eliminates one of the few opportunities in China to create a trustable asset, a securities exchange that the individual investor can trust. That’s why there’s so much money that is stuck in the property market. You own a piece of land—it’s something that you trust. Right now, you still have very low trust in the stock markets in China. This is not going to help at all.

Browne: What do Chinese tech entrepreneurs make of all this? Will it deter startups?

Rieschel: It will make it harder to bring people into startups. I’m not sure the number of startups will decline. I think it will become perhaps more selective, more difficult to recruit complete teams out of large established companies into those companies, because both the liquidity and the risk start to look a little bit more extended than you might have expected. Whether they take it so far as to really put a chill on the innovation engine that they’ve created in China in technology over the last 20 years, I don’t know. It could go down that path.

Browne: Wall Street asset managers are now stampeding into China. What lessons should they take away from this episode?

Rieschel: Well, I think you’re not going to have transparency. Twenty years ago when we were starting venture capital firms in China, investors would ask us, “What’s the China risk premium?” Well, it turns out that China wound up offering a real return that exceeded virtually anything anyone had seen before, except the very best firms in the U.S. If I’m a public market investor in China and I look at this kind of intervention, this is very different. This isn’t about risk of capital return. This is about regulatory risk and liquidity risk. It’s not about, “Can China innovate and create companies that can make great widgets and great products and services?” We’ve answered that question. [As for] the question of, “can China’s bureaucrats keep their fingers out of the market pie, such that foreign investors or even domestic investors have enough transparency to actually run their businesses?”—we don’t know yet.

Browne: Do you think the best days—the high growth days—of China tech are now behind us?

Rieschel: No, I don’t, and the way to think about it is very simple. China’s domestic market is vast, and it’s still growing quite quickly, especially for tech. If you list the top 20 enterprise software companies in the world, none of them are Chinese. I would submit to you that over time, there’ll be enterprise software companies in China that’ll be among the 5 or 10 largest, just as there has been in e-commerce, social media and so on. No question, there’s going to be a handful of semiconductor equipment companies that wind up coming out in China that’ll be as strong or as powerful as [Applied Materials Inc.] and  [ASML Holding]. That will happen over time. And so if you have the appetite for the ability to stomach the risk required to see that through over the next 5 to 10 years, I think the return profiles of Chinese investment will still be very attractive.

The fourth annual Bloomberg New Economy Forum will convene the world’s most influential leaders in Singapore on Nov. 16-19 to mobilize behind the effort to build a sustainable and inclusive global economy. Learn more here.

__________________________________________________________

Bloomberg has launched a new section called Odd Lots, an expansion of our popular markets podcast with Executive Editors Joe Weisenthal and Tracy Alloway. Become a Bloomberg.com subscriber to get access to Odd Lots exclusives on the latest market crazes, the weekly newsletter and much more. 

Download the Bloomberg app: It’s available  for iOS and  Android.

Before it’s here, it’s on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can’t find anywhere else.  Learn more.