HONG KONG -- China's venture capitalists and the startups they have nourished are facing a shakeout, as funding dries up in the wake of government efforts to contain financial risk.

In the third quarter of this year, the number of new funds registered by China-focused venture capital companies fell 52.8% compared to a year ago, according to Beijing-based research company Zero2IPO. Meanwhile, the total amount of new funding raised by the venture companies plunged nearly 70% to 35.1 billion yuan ($5 billion).

"Venture capital companies in the Chinese market are facing challenges in fundraising," said Zhao Chen, a managing partner who works at the Beijing office of Silicon Valley startup incubator Plug and Play. "They have had difficulty in raising large sums in the past few months and I think this will continue into the foreseeable future," Zhao said. Zero2IPO data show that the total amount of new funding raised in the third quarter was roughly 30% lower than the second quarter.

In apparent recognition of funding pressures, Chinese President Xi Jinping on Monday announced plans to start a science and technology board at the Shanghai Stock Exchange, a move that would allow startups access to new capital. But analysts said Xi's unexpected announcement, made at the China International Import Expo in Shanghai, lacked details and noted that such market reforms often take years to implement.

Meanwhile, industry players attribute the funding difficulties to a confluence of factors. Back in 2015, following Beijing's call for a "mass entrepreneurship," Chinese corporates, financial institutions, and provincial governments rushed to invest in funds run by venture companies. But Chinese leaders have since moved to contain financial risks, and venture capitalists started to see their funding fading away.

In April, China's central bank tightened rules on asset management, which forced bankers to withdraw from risky investments and prevented nonfinancial entities from borrowing money to invest in venture and private equity funds.

"A lot of corporates used to get low-interest loans from banks which gave them spare money to become limited partners of venture capital funds. But now, they don't have that luxury anymore," said Zhao. That, combined with a growing desire to preserve cash to cope with China's economic slowdown, has led to a new reality.

"Venture capital companies are seeing fewer and fewer corporates that can potentially become their investors," Zhao said.

Michael Ruan, the chief representative of the Sino Israel Technology Innovations, an investment company in Shanghai, said this year's stock market turmoil has also added to the problems of Chinese venture companies. With the Shanghai index down about 22% since January and the Shenzhen index slumping 33%, the bearish stock market has eaten away the fortune of Chinese companies and wealthy investors alike.

"Many corporate investors are running short of cash this year," Ruan said. To cope with the shrinking cash pool, Ruan's company has cut the fundraising target from the previous one billion yuan to 200 million yuan.

Chinese investors are also holding back their funding because many of their previous investments have yet to yield returns. Fewer companies have managed to float on mainland stock exchanges this year.

By the end of October, only 93 Chinese companies, or less than 54% of total applicants, passed the government's scrutiny to go public, according to market intelligence company Wind. In comparison, about 78% of applicants succeeded last year and that figure was as high as 92% in 2016.

Many blamed the country's startup gold rush for the higher failure rate. The fear of missing out on an opportunity has driven many funds to channel a great deal of money into untested business models. In April last year venture companies in China poured at least $160 million into 11 startups offering pay-as-you-go battery charging services in just a matter of weeks. Some of those so-called power bank sharing startups collapsed the same year, however, raising doubts over Chinese venture capitalists' capability of cashing out from their investment.

Industry sources say the difficulties are forcing out the weak in favor of the strong, and there is still appetite for the best. GGV Capital, a venture company that mainly invests in China and the U.S., recently closed a new financing round of $1.88 billion, one of the largest global fundraising efforts for venture capital companies so far this year. Qiming Venture Partners, whose investments include highflying Chinese startups such as Xiaomi and Meitu, has also raised a total of $1.2 billion in 2018.

"In general, good private equity [and venture capital funds] can continue to raise money in China," said JP Gan, a managing partner at Qiming Venture Partners. Though Gan admitted that the fundraising process "may take a bit longer."

The dearth of new funds is being felt in the start-up community. Statistics from Zero2IPO show that only 976 Chinese startups received funding from venture capitalists in the third quarter of this year, down 22.4% from a year ago. The total amount of investments they received also slid 7.5% year over year to be 46.9 billion yuan.

An entrepreneur in Shenzhen told Nikkei Asian Review that his smart speaker startup was seeking funding of hundreds of thousands of dollars -- a sum which would have been considered small last year. But the interest of several domestic venture companies had not yet borne fruit.

"Investors are struggling to raise funds for themselves," he explained.

Jason Tu, the founder of a fintech startup in Hong Kong, said: "Chinese venture capitalists have become more cautious this year." Two entrepreneurs he knew had seen investment withdrawn last minute, he said. "In the past, if venture capitalists were unsure about a startup, they would assume it is good. But now, if they are not certain, they just assume it is bad," Tu said.

Established startups are responding by increasingly seeking a Hong Kong listing in recent months, given the difficulties of raising funds from venture capital companies on the mainland, said Ringo Choi, Asia Pacific IPO leader at accounting company Ernst & Young. "I can't see any possibility for a turnaround in the short-term," Choi said.

Some see a silver lining in the funding shortage, though. Hans Tung, a managing partner of GGV Capital said the lack of capital in China would help differentiate the good startups from the bad ones.

"The [bad] ones may not be able to raise money because there are fewer funds," Tung said.

Gan believes top-notch venture capitalists and private equity funds will remain virtually unscathed by the funding shortage, and they will continue to invest. "These guys are not backing away from the market," says Gan. "All global [venture capital and private equity] companies who want to be in China are there already. Our market hasn't changed so much."

The fact that some venture capital companies will struggle to survive was not a bad thing, he suggested. "Some kind of reorganization or adjustment is probably healthy for the industry," Gan said.

Nikkei Asian Review staff writer Nikki Sun and Nikki Asian Review chief business news correspondent Kenji Kawase contributed to this article