International private equity firms, like gold prospectors, continue to invest in China, reflecting the same gold rush mentality that often results in high-stakes risks for all. The influx of new money reflects the pulling power of the new "China story," and pays little attention to the regulatory stop signs popping up along the bumpy Middle Kingdom road. Venture capital and private equity investment, mergers and acquisitions and listings are significantly impacted by new regulations for the ownership of offshore assets by China's residents. The law firm, Morrison Foerster intreprets those recent government circulars.

Despite recent regulatory rulings issued by the State Administration of Foreign exchange (SAFE) in Beijing, foreign and domestic venture capitalists remain blindly optimistic about the improving private equity landscape in China.

Global investors know that China's regulations issued in January and April 2005 aim to curb the flow of domestic capital into overseas markets with tighter controls on foreign exchanges.

A major side effect of the regulatory efforts is that it has become almost impossible for venture capital placement in overseas initial public offerings (IPOs).

Reports from China, reveal that some 80 companies invested in by venture capital companies, slated for overseas IPOs have been temporarily stalled.

The new circulars issued by the State Administration of Foreign Exchange (SAFE) are creating a dampening impact on the venture climate. Professor Mannie Liu at Renmin University speculates that the decline of venture funds into the country are linked directly to the government's latest regulations disallowing SOE assets to be illegally removal from the country. There is much lobbying taking place behind the scenes in an effort to influence policy shapers now.

China is steeped in bureaucracy and financial observers suggest that the filings at SAFE are buried behind a Great Wall of paper with an insufficient number of administrative staff and management to process any timely review.

A few venture capitalist insiders expect to see a revision as early as the end of this month. However, what is most likely is a complete overhaul and revision to the company codes and tax laws. Do not expect to see any favorable changes before spring 2006.