The narrative that international venture capitalists were looking to the Far East for the next big thing appears to have changed, as investments in China are down, both in terms of dollars and deals, as noted by the San Jose Mercury News.

2012 saw $3.7 billion dollars invested and 202 deals in mainland China, according to data from Dow Jones VentureSource. Both figures are a substantial drop from 2011′s numbers – $6.3 billion and 362 deals.

china deals VC deals and investment dollars in China drop amid political and economic uncertainty

The two Chinese IPOs in the US last year were chat client and gaming company YY and ecommerce site VIPShop. Both are doing well, with VIPShop up an astonishing 403% up since it debuted on the New York Stock Exchange last March. However, two offerings are a fraction of the activity from 2011 and 2010, which saw 15 and 38 IPOs, respectively.

GGV Capital’s Jeff Richards told Mercury News that poor performance of previous IPOs has diminished enthusiasm for startups. Admittedly, some of the hesitation on Chinese companies’ parts comes from more stringent audit checks from the Securities Exchange Commission.

However, IPOs on Chinese exchanges have also fallen. Roughly 150 local firms went public in the country last year, down 45 percent from 2011.

The reasons for VC reticence over Chinese investments are legion. The political climate in the country has been more uncertain as last year marked a leadership transition. The Chinese government has also been stepping up its Internet censorship efforts, causing problems for some internationally-minded startups. Foreign investments are also being met with more opposition and bureaucratic trouble in China than in years past.

Andreessen Horowitz’s John O’Farrell told Mercury News that “the deck is stacked against foreign companies.”

While VC gold rush of 2010 and 2011 may have receded in China, that’s not to say that the country’s tech scene is a ghost town. Ecommerce giant Alibaba and Baidu-backed travel site Qunar have both been tipped as prepping US IPOs, but they’re likely waiting for the market conditions to align.

Even as so-called “tourist investors” have slunk away from making deals in China, a number of VC firms continue to invest operations on the mainland. Mercury News reported Accel’s Jim Breyer as saying that his firm remains “very committed and optimistic” about China, with 11 partners in its Beijing and Shanghai offices. GSR’s Richard Lim remains active in the country, in spite of legal difficulties that get in the way.

In many ways, investors cooling off on Chinese deals is a necessary correction from the days when funding for local startups was almost too easy to get. Chinese Groupon clones, for instance, got loads of cash a few years ago before they flooded the market and drove margins down to unsustainable levels. After the daily deals bubble burst, a select few were left standing, but many investors lost out.

China still has plenty of tech opportunities for investors, but as some VCs look elsewhere, mainland startups will be faced with stiffer competition for international funding.

(hat tip Patrick Chovanec)

Image: Thinkstock