China Promulgates Measures on Venture Capital Enterprises
November 25th, 2005A whole bunch of PRC agencies—ten, specifically—have jointly promulgated the Provisional Administrative Measures on Venture Capital Enterprises (创业投资企业管理暂行办法, Chuangye touzi qiye guanli zanxing banfa), designated “Measure No 39.” The rules become effective March 1, 2006.
These are not the first rules on venture capital enacted in China. There have been many other policy statements and regulations addressing venture capital, including local regulations in Zhongguancun and Shenzhen and previous measures on establishing foreign-invested venture capital funds.
The gist of this new regulation is support of a home-grown, government-funded v.c. industry.
A Financial Times report, available from the China Daily website here, indicate officials noted the dramatic returns some foreign v.c. investors have obtained on PRC investments and devised these rules to try to capture such profits domestically, as well as to encourage innovation and general economic growth.
In the US, where modern v.c. approaches are most robust, the basic model is that a fund invests money in an early-stage business. The fund may give millions of dollars to college drop-outs who have no other tangible assets or prior business experience (Apple and Netscape are two examples). In exchange for the funds, the v.c. investors get a minority ownership position (through shares with special rights) in the new business. The entrepreneurs then work to develop the business, with some advice and support from the v.c. investors. After some number of iterations of this process (v.c. injections of funds and efforts to develop the business), the business (usually) fails or (sometimes) is sold to another company or has an IPO. In cases leading to successful M&A or IPO exits, the entrepreneurs and venture capitalists may get rich, earning returns dramatically larger than their initial capital investments.
Now, just about everybody wants to get rich, and most every nation wants to benefit from innovation. But the v.c. model depends on a lot of “background” things. The formation of v.c. funds, their portfolio investments, the development of valuable intellectual property and the hoped-for exits through a sale or IPO all depend on a complex of institutions that China is still developing.
Government support through funding is not a bad thing, but it won’t be enough to give China a flourishing v.c. ecosystem. A lot of work has gone on in China to make private contracts more enforceable, protect intellectual property and build capital markets. But I think most Chinese analysts would agree much remains to be done.
The new regulation is available in Chinese here.
The ten agencies promulgated the measures on Nov. 15. The State Council approved them on September 7 (I’m not sure what the sequence didn’t work the other way, since the State Council is the uber-organization of the administrative departments of China’s central government).
The enacting agencies are:
- National Development and Reform Commission (NDRC)
国家发展改革委- Ministry of Science and Technology (MOST)
科技部- Ministry of Finance (MOF)
财政部- Ministry of Commerce (MOFCOM)
商务部- People’s Bank of China (PBOC)
中国人民银行- State Administration of Taxation (SAT)
国家税务总局- State Administration for Industry and Commerce (SAIC)
国家工商行政管理总局- China Banking Regulatory Commission (CBRC)
中国银监会- China Securities Regulatory Commission (CSRC)
中国证监会- State Administration of Foreign Exchange (SAFE)
国家外汇管理局联合发布