Venture capital is flowing back into China’s artificial intelligence sector at an unprecedented rate. The South China Morning Post reports that funding for AI-related startups in China jumped nearly threefold year-on-year in the first quarter of 2026, as investors poured capital into developers of large language models and embodied AI. The surge reflects growing optimism over the country’s technology ecosystem and a renewed appetite for high-growth assets among both domestic and international investors, despite the ongoing geopolitical tensions between Beijing and Washington.
According to data released by Beijing-based venture capital and private equity research firm Zero2IPO Research, AI-related startups secured more than 110 billion yuan (US$16.2 billion) in the first three months of the year. This represents a staggering 185% increase from the same period last year. The AI funding boom has also helped lift China’s broader private equity and venture capital market, which saw total investment activity reach 2,568 deals worth 234.4 billion yuan in the March quarter, year-on-year increases of nearly 5% in deal volume and over 15% in value.
LLMs and Embodied AI Lead the Charge
Several of the quarter’s largest fundraising rounds were completed by leading generative AI developers, including Moonshot AI, StepFun, Z.ai (formerly Zhipu AI), and MiniMax, as well as embodied AI firm Galaxea AI. These blockbuster rounds highlight the intense investor focus on automation and advanced computing infrastructure, sectors that are viewed as critical to China’s future economic competitiveness. The concentration of capital in a small number of frontier AI labs mirrors the pattern seen in the United States, where a handful of companies have captured the lion’s share of venture investment.
The Zero2IPO data also points to a significant shift in the composition of AI investment. Embodied AI, the integration of AI into physical systems such as humanoid robots and autonomous vehicles, emerged as a major funding category alongside pure software and model development. This reflects the broader industry conviction that the next phase of AI value creation will come from deploying AI in the physical world, not just in digital applications.
The Return of Foreign Capital
Perhaps the most significant trend identified in the Zero2IPO report is the sharp rebound in foreign-currency investments. The number of foreign-currency deals more than doubled year-on-year to 210, while the disclosed investment value skyrocketed over 495% to 67.3 billion yuan. This capital primarily targeted AI and consumer companies, indicating that international investors are once again willing to deploy significant funds into Chinese tech startups despite ongoing geopolitical tensions.
In contrast, yuan-denominated investments fell nearly 13% to 167.1 billion yuan during the same period. The divergence suggests that while domestic capital remains cautious amid broader economic uncertainties, foreign investors are increasingly viewing China’s AI sector as a necessary component of a global technology portfolio. The influx of foreign capital is providing crucial support for Chinese AI labs as they race to match the capabilities of their American counterparts.
The Q1 data arrives at a moment of heightened scrutiny of cross-border tech investment. As EastFrontier has reported, Beijing’s intervention in the Meta-Manus deal demonstrated that foreign investment in sensitive AI companies remains subject to national security review. Yet the Zero2IPO figures suggest that this regulatory scrutiny has not dampened overall investor appetite — if anything, the combination of world-class AI capabilities and relatively low valuations compared to U.S. peers is making Chinese AI startups increasingly attractive to global capital.
The role of state capital in the Q1 funding surge should not be underestimated. China’s National Artificial Intelligence Industry Investment Fund, which is in advanced talks to lead DeepSeek’s current funding round, is one of several state-backed vehicles that have been actively deploying capital into frontier AI companies. This state support serves a dual purpose: it ensures that strategically important AI labs have the resources to compete globally, and it gives Beijing a direct stake in the companies most likely to shape the future of the technology. The combination of state backing and private capital, both domestic and foreign, is creating a uniquely powerful funding environment for Chinese AI startups, one that their American counterparts, reliant almost entirely on private venture capital, may find difficult to match at scale. If Q1 2026 is any guide, the next phase of China’s AI development will be defined not by a shortage of capital, but by the ability of its leading labs and robotics firms to convert that capital into technological breakthroughs and commercially viable products, a challenge that money alone cannot solve, but without which no amount of ambition will be sufficient.