Intel Capital and China Policy Roadmap

Filed in archive Private Equity on August 2, 2005

With no Abatement in the gold rush of US VCs into China, I continue my conversation with author and researcher, Jonsson Yinya Li, on his observations in his new book, Investing in China: The Emerging Venture Capital Industry. Jonsson is an avowed daily finance media junkie, scouring everything he can find on the latest announced venture capital deals. With multinationals like Intel Capital and their new $200 million fund directed to investments in Chinese technology companies developing innovative hardware, software, and services, the Chinese financial media remains in high overdrive reporting on the latest financings.

Intel Capital has invested in close to 50 Chinese companies. Eleven of these companies have since gone public or have been acquired, including for example, AsiaInfo Holdings Inc., a telecom software supplier and Chinacast Communications Holding Ltd., a total solution service provider for remote education and Sohu.com, an Internet portal.

Though the foreign investment capital welcome mat is out, China still struggles with a comprehensive and regulatory structure for the growth-oriented venture capital sector. Some new regulations on the surface appear to grant firms greater independence from the government, and may eventually change the government's role from a major investor in many Chinese firms to a smaller investor or a financing guarantor. The global investor jury is still out on what these new regulations mean for the industry, but few dispute that venture capital mechanisms need to be dramatically improved.

According to China VC expert Jonsson, China needs to address these important policy recommendations:
� The Company and the Partnership Acts need to be amended to provide a more flexible and effective operating environment for the VC industry.
� Partnerships are the usual form of organization used in countries with mature VC industries. The structures available in China are much more rigid making it more difficult for investors and fund managers to divide profits and risk.
� Currently, China has no law on regulations regarding
limited partnerships.
� Some provisions in the present
Partnership Act even hinders the development of limited partnerships.
� There is a need to accelerate the enactment of an Investment Fund Act as well as a Venture Capital Investment Management Act.
� VC companies in China currently face major restrictions on their funding sources.
� China should learn from and apply overseas experience by introducing investment funds to provide a structure for venture capital organizations.
� Finally, there's a need to establish a multilevel securities market system to improve the exit mechanism for VC investment.

Stay tuned to learn what steps the Chinese government will take to complete the process of loosening up on foreign or private investment.