Time: June 30th, 2005
Address: Guanlan Lake Golf Club, Shenzhen
The Organization unit: China Venture Investment Research Institute (Hong Kong)
The Chairman: Doctor Chen Gongmeng, the chief of China Venture Investment Research Institute
The Participants: See the appendix

On the afternoon of June 30th, 2005, at Guanlan Lake Golf Club, Shenzhen, China Risk Investment Research Institute (Hong Kong) held a round-table conference at which they discussed the influence to the Chinese risk industry, which was caused by “the 11th document” and “the 29th document” (called “two documents” for short hereafter) issued by the National Foreign Exchange Administration, and relevant political suggestion. The conference was presided by Chen Gongmeng, the chief of China Risk Investment Research Institute (Hong Kong), and 21 outstanding persons from the risk investment research at home and abroad attended the conference.
The conference mainly centered on two subjects: 1) the main influence to Chinese risk investment caused by the two documents and the way of the influence, and whether VC has a new channel to withdraw? 2) whether the improvement measure and the detailed implemental rules can be proposed on the basis of guaranteeing the implementation of the national macroscopic economical policy.
First, Mr. Chen elaborated the goal of the conference, that is, to collect the opinion about the “Tow Documents” from business circles systematically and comprehensively, and to form a special study report to be delivered to correlative government departments. Afterwards, all the honored guests present at the conference engaged in an extensive and in-depth exchange on the above two subjects, and actively offered their opinion and advice. Their main viewpoints are as follows:

Ⅰ. The VC field understands the original intention of the National Foreign Exchange Administration to release the tow documents

The participants indicated that they understood the original intention of the National Foreign Exchange Administration to release the tow documents, and they thought the releasing is extremely necessary. First, as the circumstance is growing in intensity that the rotten leaders of state-owned enterprises and the corrupt officials of government transfer state-owned property abroad, the release of the “Tow Documents” is helpful to prevent the drain of state-owned property. Secondly, the release is advantageous to attack those illegal persons to enjoy the preferential treatment on tax under the guise of dummy foreign capital, which is granted to foreign capital enterprise, thereby, the drain of national tax revenue is arrested. Thirdly, the release brings the overseas Red Chips into the range of supervisal of the National Foreign Exchange Administration, and such is in favor of the international flow of normative capital. Fourthly, the release is advantageous to relieve the pressure of revaluation of RMB. These years RMB has been facing biggish pressure of revaluation for the unceasing growth of Chinese foreign exchange reservation. Under these circumstances, a great deal of international unemployed capital has been pouring in China to speculate unrestrainedly in the RMB revaluation, which has intensified further the pressure of the revaluation of RMB. Before substantial reform in the exchange rate of RMB, in order to relieve the revaluation of RMB and cushion the pressure of policy-related operation to foreign exchange, the National Central Bank and the National Foreign Exchange Administration must strengthen capital control, standardize the capital outflow, and limit international unemployed capital to flow in the home.

Ⅱ. The influence of the “Two Documents”
1. The influence of the “Two Documents” to Chinese risk investment industry
The “Two Documents” was released to standardize the interstate flow of capital, but simultaneously the release has unexpectedly affected the operation of foreign risk investment. The risk investment organization of foreign capital has long been adopting the operation pattern, “Outside Two-End”. Because the “Two Documents” lacks detailed executable rules and maneuverability, for example, it doesn’t explicitly define the scope of “inhabitant within the boundaries”, and thus the withdrawal of VC through Red Chips has been affected. Yu Weifeng, a cooperator of Shanghai Tongli Law Office, thinks that it is necessary to release the two documents, and there is no special restriction in their content but an issue how to execute the terms of the documents.

(1) The “Two Documents” hinters the withdrawal of VC through Red Chips, and the risk investment organizations are waiting and seeing
Some honored guests thought that the release of the “Two Documents” makes lesser influence on the VC organizations investing in newly established enterprises, but much influence on those who are on the stage of withdrawal. But some thought that VC must consider the withdrawal while investing, but now, the channel of withdrawal for VC is blocked, therefore, the release of the “Tow Documents” can also affect the VC organizations who invest in newly established enterprises. At present, most foreign capital VC organizations are waiting and seeing, and by and large, they haven’t carried on new investment. Furthermore the previous investment is detained in the enterprises, unable to withdraw. Zhong Xiaolin, the director of Jifu Asia Investment Company, said, they had invested in 6-7 big projects each year before, but only one after the release of the “Tow Documents”. Liu Zhongzhu, the CEO of Chivest Inc, said, all the invested projects in China have been suspended.

(2) The “Two Document” increased the investment cost in China of the VC organizations
The “Two Documents” make the investment cost in China of the VC organization increase, which is embodied as the following: the release of the “Two Documents” has made it more cumbersome than necessary for the listing of the Red Chips of enterprises in China to be examined and approved, moreover, in fact, the National Foreign Exchange Administration and relative departments didn’t accept and hear any application under the circumstances that the “Two Documents” have no detailed executable rules, and this added difficulty for domestic enterprises to be listed on the stock market overseas and then delayed them to be listed. In addition, as many investment plans were obliged to come to a deadlock, VC organizations had to pay some extra cost caused by the “Two Documents”. Moreover, these VC organizations passed on the increase in costs to the invested medium and small enterprises. Thus their cost increased and then the development of domestic medium and small high-tech enterprises was affected.

(3) The issue of the “Two Documents” lowers the enthusiasm of foreign capital VC to invest in China
The investors of foreign capital VC would generally prepare for withdrawal while investing in, but now, the withdrawal became more difficult; as a result, the investors’ enthusiasm has been weakened. At the same time, the “Two Documents” depresses the faith of overseas VC organizations to invest in China, and affects VC overseas capital to be raised. Lucas Chang thinks, the issue of the two documents impacts much on American VC to invest in China, and so they will reduce the investment. He Min, a trustee of Lyons Direct Investment Company thinks, the issue will bring some difficulties for overseas funds to raise capital. In the meantime, there are many opportunities to invest in other Asian countries. Therefore if the problem is not solved in time, those overseas VC may transfer their investment to other countries, such as India, and etc.

2. Other influence

(1) The “Two Documents” which imposes uniformity on all enterprises had disadvantageous influence to the private enterprises
The issue of the “Two Documents” aims at the state-owned enterprise. But, before the two documents was issued, the National Foreign Exchange Administration didn’t consider the possible affect to the other enterprises. The issue has negative influence to the private enterprises because it imposed uniformity on all enterprises. Mr. Wen Tianluo, the general manager and a trustee of Macquarie Group thinks that it’s inequitable for private enterprises to be imposed exchange control on. The government must explicitly differentiate the right investment of VC and the malice evasion of responsibility of some private entrepreneurs. It’s not appropriate to impose uniformity on all enterprises.

(2) The issue exposed our inexactness and non-science in policy-making, which harmed the international image of China.
Zhong Xiaolin thinks, the issue of the “Two Documents” makes the investment environment of foreign capital back up 20 years and return to the 1980’s “Come 3 Supply 1” cooperative pattern toward joint venture enterprise. Lucas Chang thinks, it’s no doubt that the issue will increase the non-confidence to stability of Chinese policy and certainty of legal environment, because it’s not only reflected the issue of changeableness of Chinese policy, also the issue of “horse-drawn carriage with many heads”. Ni Jun, the vice-General Manager of Xiangzi Garden Undertaking Investment, thinks that to VC it is different in examination and approval in different areas and departments, especially the National Foreign Exchange Administration. So it’s very difficult to carry out the “Two Documents” specifically in concrete business. All these have done harm to the international image of China.

Ⅲ. The suggestion about the countermeasure & policy
1. At present, there isn’t a way to avoid the “Two Documents”, but we may adopt accommodating way.
The direct and indirect operation of overseas “Red Chips Listing” has to obey the procedure stipulated by the “Two Documents”. At present, there isn’t any feasible means to avoid the restriction of the “Two Documents”. But there are several accommodating means for choice: change the domestic joint venture limited company into foreign capital joint-stock company in order to be listed on Stock H; adopt CALL OPTION (the increasing stock option) to give the original shareholders the stock option, thus the payment for foreign exchange won’t be involved and the examination and approval of National Foreign Exchange Administration is not needed; have a second string to our bow by placing hope on medium and small enterprise while continuing to explore Red Chips listing overseas.
2. The government should correctly understand the nature and function of VC
Some honored guests think, at present, Chinese government has some prejudice to VC. They think VC is somewhat a gambling; moreover, it finally must withdraw. Jin Haitao, the chairman of the board of Shenzhen Innovation Group, thinks that in fact VC is different from “Hot Money” and “Bridge-Crossing Loan” which is just a method for VC Red Chips listing. It’s a reluctant choice for foreign capital VC to adopt Red Chips because at present RMB cannot be exchanged freely, moreover, Chinese enterprises need the international capital to participate in at different developing stages, and it’s a long-term choice for Chinese enterprises to be listed overseas by Red Chips.

3. To make “Inhabitant within Borders” explicit and issue supplemental detailed rules
The “Two Documents” doesn’t make the scope of “Inhabitant within Borders” explicit. The National Foreign Exchange Administration should issue additional regulations to make the concept of “Inhabitant within Borders” explicit. Concerning the issue of which kind of enterprises can enjoy the favorable foreign capital treatment, the related governmental departments should make it clear: Firstly, whether or not all the foreign enterprises registered at The Department of Commercial Affairs should be treated as foreign capital enterprises in industry and commerce registration; Secondly, whether or not the companies which are registered abroad and then invest in China should be given favorable tax treatment as foreign investment, and the like.

4. To place great expectation on “International Exchange of Stock”
The participants place great expectation on the following issue of stipulation on “International Exchange of Stock”. They also think that at present, there are still some problems of the “International Exchange of Stock” in discussion of the related governmental departments, for instance, it is now very difficult for the VC organizations to meet the requirement of some items. Therefore, we suggest that the related governmental departments make a corresponding revision to the detailed rules in order to regulate it for more practical and more operational significance.

5. To realize the full circulation of medium and small enterprises ASAP and create a favorable condition for the withdrawal of venture investment
It will be advantageous to the withdrawal of venture investment to realize the full circulation in medium and small enterprises and make them truly turn into starting undertaking part. And this is very important and advantageous for the domestic venture investment. Mr. He Min, a trustee of Lyons Direct Investment Limited Company , thinks that Red Chips is not necessarily the best withdrawal channel for venture investment because Red Chips is overseas BVI after all and cannot guarantee the domestic shareholders’ rights and interests. On the contrary, common enterprises, such as Chinese and foreign joint venture enterprises, can guarantee more to the investors.

6. When the government formulates policy, they should fully investigate and study the overseas experience, moreover, the related departments should strengthen their communication and the coordination.
As the issue of the “Two Documents” has made the foreign capital VC think that Chinese law is changeable and unstable, and thus depresses China’s international image, the participants suggested, when issuing related policy, the Chinese government should strengthen the communication and coordination among the related departments and consult international common practice, and should have a trial before normal issue, otherwise, the international image of China will be harmed.
In addition, some of the participants suggested, since it is Chinese government’s basic policy to encourage Chinese enterprises, including private enterprise, “To Go Out”, the governments should consider letting private enterprises use part of national foreign exchange reserve to help them go abroad to do international investment and purchase in order to strengthen our economy. But, at present, large state-owned enterprises occupy most of foreign exchange share to purchase overseas.
At the end of the meeting, Mr. Chen Gongmeng made a conclusion. He said, China has made great achievement in the past 25 years, but it cost much natural resource. In the future, for economic development, China should go the way of innovation, including scientific innovation, administrative innovation, systematic innovation and so on. The government should consider VC as an important strategic status, not only a supplemental means.
At the same time, Mr. Chen indicated, China Venture Investment Academy would study further in the light of the meeting, and then form a special report, submit it to related governmental departments as a reference for decision-making. Mr. Chen also introduced some new research subjects and business in China Venture Investment Academe. In the end, he said that his academy would continue to work hard to strengthen the communication and coordination with related governmental departments for the development of Chinese venture investment cause.