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China cracks down on start-up investing

Should we be worried about China?

The Chinese government is reportedly cracking down on would-be start-up investors.

Warburg Pincus and Temasek both have been bounced from an investment round in online bank WeBank, a Chinese financial technology (fintech) firm, the Wall Street Journal reported late Monday. According to the Journal's report, the move by Chinese bank regulators to bar foreign investors from buying into the China-based start-up forced it to take capital from other backers at a lower valuation.

It's a move that has the potential to crimp the flow of money that has come to the country to back budding technology and start-ups. But others say it's also a reminder that foreign governments have a different view of what it means to take part in an open market, and market watchers believe it's indicative of what challenges other investors may face as they look to profit from the scale of the world's most populous country.

"China is just an extremely difficult place for tech companies to gain traction and succeed," said Scott Kessler, equity research analyst with S&P Global Market Intelligence. "It's extremely difficult because… it's the best home-court advantage in the world. The government has afforded advantages to home-grown companies."

People sit in 'Garage Cafe'on March 18, 2016 in Beijing, China.The cafe serves as a hub for investors and entrepreneurs to meet and create startups.Beijing boasts the world's second-largest number of most valuable tech startups.
Emmanuel Wong | Getty Images

Temasek representatives did not comment when reached and a Warburg Pincus spokeswoman did not immediately respond to a request seeking comment. Attempts to reach WeBank representatives were unsuccessful.

The U.S. has also blocked deals in which Chinese firms sought to buy into American companies, including a wind farm deal President Barack Obama's administration halted in 2012.

Lise Buyer, partner with Class V Group, which works with pre-initial public offering start-ups, noted that China's move may have good intentions.

"Investors get to assess the risks and make their own decisions," she said. "This time, the Chinese government did it for them."

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It's not the first time foreign investors got a surprise after investing in China. Kessler compared the failed attempt by U.S. investors to buy into the start-up to another incident, several years ago, in which Yahoo and Alibaba fought for months over the Chinese company's management of fintech company Alipay.

Both incidents, years apart, included rising companies in the fintech space. And, according to Erik Gordon, clinical assistant professor at the University of Michigan's Ross School of Business, it's a key link.

"The Chinese government doesn't want to lose control of the domestic banking sector," he said. "Chinese share owners are more sensitive than foreign owners to the cultural and other forces the government can apply."