China Inc. to Bolster Domestic Venture Capital Industry

Filed in archive Law on November 28, 2005

The Financial Times has confirmed what this blog has been reporting for months that China Inc. is commiting more funds to bolster their own domestic venture capital industry to assist companies in high-growth sectors such as technology. The signal from Silicon Valley VCs is that this will not be a level playing field for the overseas investor seeking quality tech investments.

This government push is likely to increase competition and reduce returns for foreign private equity groups. Bobby Chao Chairman and Founder of Silicon Valley's Dragon Venture speaks to this issue for CVN.

"This preferential treatment will not be welcomed by foreign investors. In a way, it is like government subsidizing certain industries to fend off foreign competitors. Has U.S. government restricted Chinese companies to go IPO on U.S. public market? While we continue advocating the genuine free market driven economy, it's not our belief that any government should interfere in the venture capital investment business. It is the free and adventurous spirit that created Silicon Valley. What the National Development and Reform Commission is proposing to do will only give people the message that government will eventually play big brother to bail out the weak under-achievers and that is not for our business," claims Chao.

China's powerful
National Development and Reform Commission (NDRC) appears set on creating domestic venture capital champions by offering them preferential treatment over their foreign rivals.

According to the blog,
China Net Investor, "The initiative -- known as "Measure no.39" - has caused concern and disappointment among foreign private equity groups, which dominate China's venture capital sector, and trade officials." The initiative by the National Development and Reform Commission, China's chief economic planning body, is designed to foster homegrown venture capitalists by offering them better tax treatment and easier exit routes than foreign rivals.

Mario W. Cardullo, Counselor for Technology and Entrepreneurism at the U.S. Department of Commerce in Washington, D.C. does not think these proposed changes will impact the venture capital playing field. "I believe that the new NDRC regs will not really change anything because the local VCs are still not up to the quality of those in the Valley. As long as it doesn't put barriers in the way of western VCs and investors, because these tax incentives will not change the expertise and behavior of the Chinese VCs," states Cardullo in an e-mail with CVN.

The NDRC's rules encourage local governments to provide direct investments, loans and debt guarantees to domestic venture capital funds, which will be required to have only Chinese nationals among top management and investors.

CVN attempted to contact Chang Sun, Managing Director of Warburg Pincus Asia and founder of the China Venture Capital Association for comments, but he declined to address this issue.

The proposed measures, expected to come into force in March 2006, could help address the funding problems of most Chinese small tech enterprises, which are regularly shunned by state banks who favour government-owned enterprises.

Just a few years ago, overseas venture capital (VC) firms were calling for more government efforts to create a sound regulatory environment to boost the domestic VC market, now that same government is taking decisive steps to boost entrepreneurship. Who knows, China's new VC rules may spark a new wave of entrepreneurs and push enterprise development forward.