The Complexities of Due Diligence on Emerging Tech Firms in China

As 2025 unfolds, more Chinese emerging tech firms are actively engaging with global investors to secure funding, despite facing a complex landscape shaped by regulatory changes and geopolitical dynamics.

There are reports that Chinese AI startup DeepSeek is considering raising outside funding for the first time to support its rapid growth. DeepSeek also sparked a surge in stock purchases for companies linked to cutting-edge technology. Zhipu AI, a leading Chinese large model player, raised USD 420 million in late 2024 with its valuation reaching approximately USD 2.75 billion. Word on the street is that Unitree Robotics’ shareholders are holding on to their pre-IPO shares despite heated demand on the primary market.

Amidst all this financing frenzy, conducting due diligence is a vital process that helps investors make informed decisions, avoid costly mistakes, and establish a solid foundation for a successful and sustainable portfolio. It is not always a straightforward process as many would think, however. Due diligence on Chinese emerging tech companies can be challenging for various reasons:

1. Lack of Transparency	Chinese companies, especially emerging ones, may have limited financial and operational transparency. Some firms are not required to adhere to the same reporting standards as companies in Western markets, making it difficult to verify their financials and operations. This is particularly true for private firms and startups.
2. Complex Corporate Structures	Many Chinese tech companies use complicated structures, such as Variable Interest Entities (VIEs), to circumvent Chinese restrictions on foreign investment. This structure can make it hard for investors to understand the ownership, control, and risks involved.
3. Regulatory Environment	The Chinese regulatory environment is evolving rapidly, with frequent changes that can affect business operations. The government's increasing focus on data security, antitrust, and the tech sector overall has introduced uncertainties. Companies might have to adjust to sudden changes in policies, which can significantly impact their growth or market position.
4. Limited Access to Key Information	Due to language barriers, cultural differences, and limited access to reliable local information, conducting due diligence can be much harder. It might be difficult to gather reliable sources, and foreign investors may struggle with understanding local market dynamics and gathering insider knowledge.
5. Political Influence	The Chinese government plays a significant role in the country's tech industry. The Communist Party's influence can result in unpredictable shifts in policy, which makes it difficult for external investors to gauge risks.
6. Geopolitical Risks	Tensions between China and other countries (especially the US) can add layers of uncertainty. Trade restrictions, sanctions, and changing diplomatic relations may impact Chinese tech companies' ability to operate internationally, especially if they depend on foreign markets or technologies.
7. Inconsistent Financial Reporting	Auditing practices in China can differ significantly from those in other parts of the world, making it difficult for international investors to assess a company’s financial health accurately. Some companies may have inflated valuations or financial performance, which could make due diligence even more challenging.
8. Cultural Differences	There are also cultural and business practice differences that can affect due diligence processes. Understanding the nuances of Chinese corporate culture and relationships is vital to assessing the true risks of a company. Many deals may involve personal relationships that are not immediately apparent to outside investors.

Despite the challenges, the ongoing innovation within China's tech sector presents investment opportunities that are too good to be missed. To mitigate the risks posed by these issues, investors can benefit from the expertise of consulting firms with a strong local presence in China, such as Grapevine Asia. Our firm, with over a decade of experience operating in the country, has developed a reliable and effective approach to conducting due diligence in this complex environment. We leverage our local expertise, extensive network, and deep knowledge to help investors navigate risks and make informed decisions.

Grapevine Asia Partners is a boutique risk consultancy established by a team of skilled corporate-intelligence research analysts and anti-fraud experts, who collectively have decades of experience in Asia, particularly in Greater China and Southeast Asia. Our firm actively monitors policy changes and regulatory investigations involving multinational companies. Aside from collecting, interpreting, and analyzing up-to-date information from credible sources, Grapevine Asia also supports clients in liaising with law enforcement and regulatory agencies to facilitate case resolution. We have extensive experience in dealing with law enforcement, particularly on matters involving embezzlement, private sector bribery, trade secrets theft, and intellectual property infringement.