Like China itself, the venture capital scene has witnessed some dynamic change. Dr. Gongmeng Chen, the director of the Hong Kong based China Venture Capital Research Institute has just released their latest annual China VC Yearbook. This acclaimed baedecker on China venture capital includes more than 900 pages and 400 charts and tables. In an earlier interview with CVN, the director stated, ""The role of the CVCRI is to help the government shape VC related policies and to assist both the domestic VCs and international VC firms in China."

Chen is an academic evangelist for the new China VC roadmap and his institute publishes several key publications including a distinguished quarterly, China Venture Capital Journal, now only in Chinese, but expected to be published in English later on in 2006. Dr. Gongmeng Chen kindly responded to a few key questions about the state of China venture capital.

CVN: With the newly released 2006 Annual China Venture Capital Yearbook, what significant developments have you witnessed in the past year that have
measureably impacted on venture capital in China?

GC: China's National 11th Five-Year Plan (2006-2010) has established self-innovation and Venture Capital as a National Strategy. I predict that Venture Capital in China will have a golden period in the following 10 to 20 years. In March 2006, the State Council has promulgated a new policy to further stimulate the development of the venture capital industry in China. The positive impacts include: first and foremost, the continuous economic expansion and opening up of industries which is spurring the development of venture capital; the participation of a large pool of foreign venture capital institutions bring China both opportunities and experience; and the relaxation of the restriction on private placement continues to pave the way for private capital to invest in the venture capital industry.

CVN: Have the domestic VCs matured and is there noticeable progress made by them?

GC: So far, in China, the VCs from overseas are still playing a main role in China's VC industry. The local VCs have not yet fully matured. However, I think the domestic VCs will develop quickly in the following years.Certianly, the venture capital investment environment still needs further improvement.

CVN: Silicon Valley VCs continue to dominate the industry picture in China. Are Chinese tech companies benefiting from the influx of investment capital?

GC: Not only Silicon Valley VCs, but those from Europe and Asia flourish in China. I do believe that Chinese tech companies beneft from the influx of investment capital. China's VC industry and high-tech firms need the global VCs, while the global VCs need China.

CVN: How would you explain to our readers what China's version of its private equity model is today?

GC: Most overseas VCs now active in China are actually in late stage private equity deals. That is, they establish funds and management firm overseas. While they find suitable investment candidates in mainland China, they than set up an offshore company which the VC fund and the invested company's owners co-own. The invested amount of capital will directly flow from the VC fund to the offshore company. The offshore company owns (usually 100%) of the domestic company.

CVN: Has China made it easier in 2006 for listed firms ito raise capital?

GC: Last year, China's stock markets experienced a historical reform where the government now allows all shares (legal shares and state shares) of listed firms to be fully tradable. I think at the end of 2006 and beyond China's stock market will gradually become more market-oriented and internationalized, which means that it will be easier for listed firms to raise capital in China's capital markets.

CVN: Do you think there is too many VC funds chasing too few good deals in China?

GC: There's no doubt that with more and more capital flowing into China the competition will become fiercer. However, I think the potential opportunities are still huge given that China's market potential has not yet become fully released and the entrepreneurship in China continues to grow in popularity. In addition, Western China and North Eastern China are far from developed. The situation in these regions is very similar to Eastern China in the late 80s.

CVN: What's the greatest challenge for the facing venture capital in China?

GC: Finding good deals and adding professional values, which are really valuable to China companies.