venture capital investment continues to grow in China, but it is changing direction in China according to a recent report by Ernst & Young and Dow Jones VentureOne on third quarter venture capital deals.

Venture capital investment in China is up by 5% this year over Q3 of 2006. VC firms invested $677 million in 59 deals in China. The new direction of VC funding, however, has meant that almost half of that money has been "plowed," in the words of Red Herring, into consumer and business services. The big loser? Investment in information technology dropped 23 percent over last year - just 24 deals valued at U.S. $217 million.




The Q3 totals bring VC investment in China to about $1.7 billion so far this year.

While investment in information services was down for the quarter, AltAssets is reporting that "Internet hardware maker Cisco Systems plans to spend $16 billion in procurement, education, research, and joint ventures in China."

AltAssets also reported that over half of the 59 Q3 deals were first round investments that leave plenty of room for more funding later.