On the afternoon of September 8, 2005, the Venture Capital Cooperation and Development in China Roundtable 2005, hosted by the China Venture Capital Research Institute and co-organized by the World Economic Forum, was successfully held at the Grand Hyatt Beijing. The meeting was chaired by Dr. Gongmeng Chen, Director of the China Venture Capital Research Institute. The participants included 13 policy-makers from the Policy Research Office of State Department, the National Development and Reform Commission, the Ministry of Commerce, the Ministry of Science and Technology, the State Administration of Foreign Exchange, China's Securities Regulatory Commission, and the Shenzhen Stock Exchange, etc., 7 experts and scholars in the venture capital circle, 8 high-ranking Chinese venture capitalists, and 30 prominent foreign venture capital experts and practitioners.
The meeting started with the welcome speech by Kevin Steinberg, Senior Director of the World Economic Forum, who gave a warm welcome to the participants on behalf of the World Economic Forum. Then the host of the meeting, Dr. Gongmeng Chen, briefed the participants on the aim of the meeting – enhancing direct communications between government departments and practitioners, scholars and experts to allow the venture capital community to better understand government policies as well as to help government departments to better capture the actual circumstances and existing problems of the venture capital sector so that they can devise make more practical policies and regulations. The meeting was carried out in four sessions. In the first session, 4 Chinese venture capitalists delivered speeches on the difficulties and problems confronted by domestic venture capital institutions from the perspective of investment environment, policy environment, the venture capital investment system, etc. This session was followed by speeches from 4 high-ranking international venture capitalists who are engaged in venture capital investment activities in China. They discussed their investment experience in China and the difficulties and problems they have encountered, and proposed solutions to those problems. Based on the difficulties and problems brought up by the previous speakers, in the discussion session venture capital exerts, policy-makers, and scholars carried out an extensive dialogue and exchanged their creative ideas. After a 15-minute tea break, in the third session, 5 policy-makers from the management departments discussed policy-making and introduced the most up to date policy orientations from the government’s side. In the fourth session, experts and scholars highlighted the development history of China’s venture capital industry. At the end of the session, Prof. Siwei Cheng, Vice Chairman of the National People's Congress, delivered the wrap-up speech and ended the meeting.
During the meeting, the participants engaged in extensive and profound discussions and expressed their opinions on many important issues. The major points of view from this roundtable meeting are summarized as follows.
I. Current status of China’s venture capital industry and its difficulties and problems
The participants noted that foreign venture capital is very active in China and the development of domestic venture capital is failing to keep pace. Foreign venture capital investments are more inclined to globalization, whereas for domestic venture capital, state-owned capital and company structure are still the main constituents, which are characterized by a simplistic equity structure. Consequently, domestic venture capital institutions will lose their attraction to talents and suffer from a contraction of domestically invested funds, ultimately causing a bigger gap between Chinese venture capital and foreign venture capital. Simultaneously, the difficulties and problems confronted by international and domestic venture capital are also different. To be more exact, difficulties and problems faced by domestic venture capital are as follows: most domestic venture capital institutions suffer from deficient systems and lack of vitality; the government is not placing enough emphasis on venture capitalism and its support is not as effective as that of developed countries and some developing countries. In addition, the current government support is not prioritized; the Shenzhen SME Board cannot accommodate the financing demand of SMEs as well as the needs for venture capital exit, and the venture capital industry is urgently calling for talents and funding. The difficulties and problems faced by international venture capital mainly include: the promulgation of Decrees No. 11 and No. 29, the restrictions of Chinese policies and policy instabilities, and the fact that communication and cooperation between foreign and domestic venture capital is frustrating.
1. Existing difficulties and problems confronted by Chinese venture capitalists
Although some Chinese venture capital institutions can still achieve relatively satisfactory performances in the current market environment (as a representative from China Science and Merchants Venture Capital Management presented, the company’s ROE in 2003 was 16%, and its earnings on cash was 10%; its ROE in 2004 increased to 16%, and its earnings on cash climbed to 15%.), China’s venture capital industry is generally lagging, and many difficulties and problems still exist.
1.1 Inflexible venture capital investment mechanism, lack of competitiveness
Dr. Gongmeng Chen, Director of the China Venture Capital Research Institute indicated that most domestic venture capital institutions carry a government background or were once state owned enterprises (SOEs). These institutions are mainly sponsored by the Department of Science and Technology of the localities. That is to say, they are quasi-government investment institutions. The inherent SOE features of the Chinese venture capital institutions deprive them of the capability of adapting to the high marketization, ardent competition, high intelligence, and high-responsiveness of the venture capital industry. The underlying reason for the deficient development of state-owned venture capital institutions is that they lack a market-oriented employment mechanism, incentive system, supervision system, and inhibition system. From this perspective, if we do not thoroughly press forward with the marketization and globalization reform of the current system that has impeded the development of Chinese venture capital institutions, even though we have solved the problem of the market exit mechanism and completed the reform of issuing of favorable taxation policies, it will only be a temporary solution as it cannot create long-term intrinsic development. Xucai Yang, Executive President of the Tianjin Venture Capital Association also commented that the domestic venture capital system lacks both flexibility and competitiveness.
1.2 The central government is not placing enough emphasis on venture capitalism
Guojie He, Chairman of the Guangdong Venture Capital Association, said that the government is not placing enough emphasis on the venture capital industry, and that governmental support for this sector lags far behind those of developed countries and even some developing countries. Meanwhile, unlike what occurred in other industries, the government has failed to prioritize the key areas to benefit from its support. For instance, it has not clarified whether it will support innovation-oriented enterprises or venture capital institutions.
1.3 China’s market and policy environments have restrained the adjustment of the venture capital management structure
Mr. He indicated that the state-owned venture capital sector is carrying out its transition in four ways. First, state owned venture capital institutions are transforming into government-invested authoritative institutions. For instance, in Shanghai and Jiangsu, state-owned venture capital has been transformed into funds that are now authorizing small investment firms to carry out investment activities. Second, state owned venture capital institutions are transforming into stock holding companies, exerting the same function as investment institutions. Third, they are transforming toward industrial chain models. Some listed companies have set up investment companies within the industrial chain to better meet the demand for development. Fourth, state owned venture capital institutions are seeking to transform into specialized and regionalized investment funds. However, the market and policy environments have somehow restrained the adjustment of the venture capital management structure.
1.4 The SME Board cannot accommodate the financing needs of SMEs and support the exit of venture capital
Dr. Wuhua Long, Director of the SME Board of the Shenzhen Stock Exchange, pointed out that since the SME Board was launched over a year ago, it has gained some extraordinary experience. First, the SME Board has developed to a certain scale. There are 50 companies listed on the SME Board, with a total investment of 12 billion Yuan and a market capitalization of 43.5 billion Yuan. Second, the SME Board provides support to hi-tech companies. Among the 50 companies, 33 are high-tech companies (22 of them belong to the National Torch Plan), which are at the top of the industry. Third, the performances of listed companies on the SME Board are better than those in the Main Board, averaging at 0.19 Yuan of earnings per share. Earnings per share for the Shenzhen Main Board averages 0.10 Yuan and for Shanghai Stock Exchange 0.15 Yuan. Fourth, it enjoys high growth, which is one of the highlights of the market economy. In the past two years, the domestic capital market has been stagnant. On August 22, 2005, transactions on the SME Board reached 113.3 billion Yuan, with a turnover ratio of 1164, which was greater than that of the Main Board. Fifth, the supervision practices have been gradually perfected. The Creditability Construction Directory, the Sponsor Directory, and the Directors Directory are much stricter than those of the Main Board. Finally, among the 50 listed companies, 15 are venture capital firms, with an accumulated original investment of 0.1 billion Yuan. The Board’s net asset value has increased by 12.4 times and its market capitalization has increased by 40 times.
Despite this, the SME Board cannot accommodate the needs of SMEs in their financing activities or the exit of venture capital funds. Statistics from the Shenzhen Stock Exchange show that the approximate number of enterprises that are close to the standard is 3000. So far, the scale of the Shenzhen SME Board cannot yet adapt to the tremendous financing demand of fast-growing SMEs. Seen from the current operational status, its extended significance is greater than what it means in itself. There are still plenty of flaws and limitations in the actual practices.
1.5 The venture capital industry lacks talents and capital
Guojie He and Xucai Yang, Executive President of the Tianjin Venture Capital Association, both thought that very least of the domestic funds went to venture capital industry due to restrictions of various government policies. In addition, the venture capital industry lacks high quality talents to a great extent.
2. Difficulties and problems faced by international venture capitalists when they are investing in China
Ta-Lin Hsu, Chairman of H&Q Asia Pacific believed that China will become the world's most vigorous venture capital market and we should maintain our confidence in this. Plus, China already possesses talents, capital, and the entrepreneurial spirit that are most needed for the development of venture capitalism. Jean-Bernard Schmidt, Chairman of Sofinnova Partners, commented that as China is the market which enjoys the fastest economic growth in the world, it has attracted many European venture capital funds. Although numerous international venture capitalists see a good future in the Chinese market and they have achieved satisfactory returns from their investment in China, they are still faced with problems and difficulties when they engage in investment.
2.1 Issue of Decrees No.11 and No.29 by the State Administration of Foreign Exchange seriously affected foreign venture capitalism
Dr. Gongmeng Chen, Director of the China Venture Capital Research Institute said that according to surveys conducted by his institute, the vast majority of venture capitalists see the issue of Decrees No.11 and No.29 early this year as a good sign. In recent years China has indeed suffered serious capital drain to foreign countries, but we should not crack down on both the good and the bad. The major problems of these two decrees are as follows.
（1）The “cut at one stroke” dimension creates obstacles for the development of foreign venture capital. The central government will inhibit the embezzling and stealing capital by circumventing legislative flaws, but we should also recognize the significant contributions to the development of China’s innovation economy from foreign venture capital and understand the operational models that foreign venture capitals have to adopt under China’s current economic environment.
（2）The two decrees are not easy to enact and the concept and policies behind them are vague. For instance, the two decrees fail to provide a clear definition of “residents in China”. There are tens of millions of residents in China with assets or equity here; if we assume that only one out of a thousand residents expects to obtain equity in or other property rights of an overseas enterprise, will the State Administration of Foreign Exchange be able to handle and verify this type of investment activity?
2.2 Policy restrictions and instability of policies
Yan Yan, President of Information Infrastructure, Softbank Asia, pointed out that legislation restricts foreign capital from entering China from many perspectives. For instance, foreign capital is not allowed to invest in companies such as netease.com and sohu.com, etc. In this case, foreign venture capital has to use other channels. The listing of red-chip shares overseas for some Chinese enterprises is a case in point. Not only that, but there are quite a few problems in exit, taxation, legislation, etc., which are mainly manifested in the instability of policies. For example, the two decrees from the State Administration of Foreign Exchange would never be issued in other countries. He also reminded the participants that taxation is a double-edged sword: on the one hand, it mediates industries that are not supported by the government; on the other hand, it encourages government-supported industries.
2.3 Other issues
Mr. Yan also indicated that venture capital institutions should have non-incorporated structures, otherwise, it will likely result in double taxation. Although the savings per capita in China ranks the highest in the world, capital utility is the lowest. To levy tax on venture capital funds will help capital such as pension funds to enter venture capital sector. Youzhong Chen, General Manager of China, Acer Venture Capital, commented that there are no good channels through which foreign venture capital and Chinese venture capital can communicate, and that cooperation between the two is very difficult.
II. Suggestions on policy making and new policy trends
After a heated discussion between the participants, it was generally agreed that the development of Chinese private enterprises calls for effort from the government. While the government seeks to push forward the development of private enterprises, it should be forward-looking and authoritative. It should have a consistent plan and a specialized institution to carry out that development rather than managing through numerous levels of government. The participants also suggested that government departments should impel the development of China’s venture capital industry through formulating proactive and preferential policies.
1. Suggestions on policy-making
1.1 Encourage venture capital fund formation
Wanshou Li, Executive Deputy General Manager of Shenzhen Capital Group Co., Ltd. suggested that the central government should adopt appropriate measures to clarify the status of venture capital and legalize venture capital funds, including the implementation of proactive policies such as a limited partnership system and preferential tax policies, etc., to attract private capital to invest in the venture capital field, the direction of private capital into the venture capital sector via state-owned capital, the support and setting up of private capital funds, the use state-owned capital to set up offshore funds to raise capital to support the development of domestic enterprisers, and allowing funds such as social security funds to invest in the venture capital industry at an appropriate percentage.
1.2 Improve the operational mechanism of venture capital
According to Lihong Guo, Director of the Technical Economy Research Department of the Development Research Centre under the State Department, venture capital comes in three forms: through the corporate system, through the trust system, and through the limited partnership system. The corporate system is the least efficient as Chinese venture capital is mainly sponsored by the government or SOEs. In addition, the biggest problem that Chinese venture capital is facing is the integration of management and investment firms. Even if they are separated, the use of management firms to manage investment firms still cannot overcome the problem of double taxation and the disadvantage that professional management personals cannot accumulate good performance and credits.
1.3 Diversify venture capital exit channels
Mr. Li proposed that to create better exit channels for venture capital, we should establish a multi-level capital market and carry out equity division reform to make possible the circulation of all shares and enable the SME Board to transform into a Growth Enterprise Market Board. At the same time, he urged that the department concerned should issue regulations on cross-border stock exchange as soon as possible to facilitate the overseas listing of Chinese-based enterprises. Regarding the establishment of offshore companies, he thought that the verification system is too strict and the supervisee department should consider shifting to a registration and recording system or referring to QFII while engaging in supervision.
Ta-Lin Hsu, Chairman of H&Q Asia Pacific, thought that venture capital is closely associated with returns. We don’t need to talk about venture capital if there are no good returns. With a good exit mechanism, there will be more investors in the venture capital sector. One of the important factors of the success of Silicon Valley is that there is very good exit channel in the U.S: the NASDAQ. To help venture capital to exit through IPOs, China needs an effective Second Board market. The establishment of a Second Board market is critical, as it not only favors the exit of venture capital, but will also motivate entrepreneurs. From the point of view of Richard Wang of Trainer Bank, another feasible solution for the exit of venture capital is through MBOs, transferring equity to overseas enterprises, which will in return bring higher profit to the venture capitalists.
Lihong Guo, Director of the Technical Economy Research Department of Development Research Centre of the State Department suggested that what China needs badly at this moment is not Growth Enterprise Market, but a low-end market in a multi-layered capital market, such as the OTCBB market in NASDAQ and the OTC market in Taiwan.
1.4 Establishing venture capital associations and enhancing industrial discipline
Professor Martin Haemmig from CeTIM proposed that we should encourage industrial associations and establish open dialogue and communication between venture capital associations and the government with a view to persuade and convince government about the benefit of venture capital institutions. Dr. Mei Xinyu from the Research Department of the Ministry of Commerce believed that the relationship between governmental supervision and industrial discipline should be properly addressed. The venture capital industry should strengthen its industrial discipline and mitigate against its negative elements. The government, in turn, should provide an incentive system for law-observing enterprises.
1.5 Accurately position venture capital and provide support in corporate governance, taxation and capital flow.
Dr. Gongmeng Chen, Director of the China Venture Capital Research Institute suggested that to truly support the development of the venture capital industry, the government should provide various kinds of favorable taxation policies and define them well through regulations and acts. Since 1998, governments at all levels have promulgated numerous polices and regulations to encourage venture capital development. However, not many of them are strictly carried out. Therefore, the government should adopt appropriate incentive measures for venture capital investment. It should primarily support venture capital institutions that are truly into venture capital business, which support innovation-oriented start-up enterprises. It should also conduct an in-depth study and comparison of the cost and profit of different incentive models to maximize the benefit of the limited financial support. Finally, the government should provide details of implement favorable measures at the right levels. As many favorable polices for venture capital are jointly promulgated by several government departments, when a policy is issued, most of the time it cannot be effectively implemented due to lack of coordination between the departments. Hence, Dr. Chen proposed that the government should establish or appoint a policy coordination institution so that numerous venture capital institutions will have a real “agent”.
1.6 Properly understand foreign venture capital
Dr. Chen also said that the influence of foreign venture capital institutions should not be overlooked. In the mid- to long-term, foreign venture capital will be conducive to China’s economic development. Its contributions are manifested in the following ways. First, it has introduced the advanced management and operational experience from the world venture capital community to China, raising the overall standard of China’s venture capital industry. Second, it has significantly pushed forward the development of China’s innovation economy. For instance, without the presence of foreign venture capital, the Internet economy would not have made such remarkable achievements, and many renowned enterprises such as Sina and Alibaba, which are now notable contributors to the economy, would not have appeared. Third, foreign venture capital has upgraded the management level of venture capital supported Chinese enterprises and helped them to improve their corporate governance structure. Fourth, the success of numerous start-ups injected with foreign capital, including Shanda and Focusmedia among others, have greatly aroused the enthusiasm of many young talents for starting up business. Fifth, foreign venture capital alleviates the capital shortage problem for Chinese SMEs. In this case, the government should not restrict foreign venture capital, but should provide appropriate encouragement and support. Youzhong Chen, GM of Acer Technology Ventures Asia Pacific Ltd., sees foreign venture capital as a great contributor to China: the annual capital injection from foreign venture capital averages approximately US$1 billion and has been increasing all along. Most foreign venture capital institutions are oriented toward companies that are in the seeding stage and they provide various kinds of value-added services, such as introducing business partners, helping with the establishment and operations of boards of directors and assisting Chinese enterprises to list overseas, etc.
1.7 Fill in the blanks after the equity division reform
Richard Wang from Trainer Bank said that before the equity division reform, foreign capital could acquire the cooperation share of Chinese listed companies. After the equity division reform has been completed and all A shares are in circulation, according to the regulations of the Chinese law, foreign capital will not be allowed to invest in A shares. This leaves a policy blank. Mr. Wang proposed that the departments concerned should allow foreign investors to set up investment institutions to purchase a limited amount of the reduced shares from the legal shareholders of listed companies.
In addition, Kevin Steinberg, Senior Director of the World Economic Forum, suggested that a bridge for dialogue and cooperation should be built between domestic and overseas venture capital institutions to facilitate communications. This will help Chinese venture capital to learn from the advanced international venture capital practice and improve its investment level and performances.
2. Thoughts on policy making from policy makers and the trend of new policies
2.1 Thoughts on policy-making
（1）Policy-making thoughts for Decrees No.11 and No.29
Lujun Sun, Deputy Director of the Capital and Project Management Department of the State Administration of Foreign Exchange explained the background for the issuing of Decrees No. 11 and No. 29. He said that the State Administration of Foreign Exchange believes that the current domestic capital market is underdeveloped and simplistic, which forces SMEs, especially private enterprises, to absorb foreign capital through overseas shell companies. This practice has its rationality and inevitability, but also has some inherent problems, such as capital removal and tax evasion, etc. It sometimes conflicts with the existing regulations when it comes to specific practices. For this reason, the State Administration of Foreign Exchange enacted Decrees No. 11 and No. 29 with the view to provide regulations and directional instructions for the above issues. The purpose of the two decrees is not to restrict the overseas financing activities of Chinese enterprises, but to regulate and discipline their development.
（2）Management Principals for the State Administration of Foreign Exchange
Mr. Sun also discussed the management principals of the State Administration of Foreign Exchange. The first principle is to neither interfere and nor skip supposed responsibilities. This means that the State Administration of Foreign Exchange will provide effective management when it is supposed to. At present, current accounts have been changed into convertible accounts, but capital accounts have not. Therefore, the State Administration of Foreign Exchange still needs to manage capital accounts. For those that comply with existing policies and laws, the State Administration of Foreign Exchange will encourage and support them. Second, the management concepts of the State Administration of Foreign Exchange are changing, from originally relying on administrative means with direct approval to market-oriented indirect management. Third, the State Administration of Foreign Exchange bears the responsibility for managing inflows and outflows of capital. It has shifted its emphasis from managing capital outflows to balanced management of both outflows and inflows and carrying out stringent management especially for short-term and speculative capital inflows.
（3）Some considerations while selecting venture capital policies
Dr. Xinyu Mei from the Research Department of the Ministry of Commerce listed the elements that the government takes into account when it selects venture capital policies: one is the timing for accelerating the development of venture capital. Although venture capital is a critical attributor to the innovation economy, there are no easily available exit channels for it. Under such circumstances, government resources might be invested in vain at the wrong moment. The second concern is whether venture capital development should count on domestic or foreign capital. Chinese-invested enterprises suffer from high tax rates, which is not favorable to their development. In the long run, the development of China’s venture capital industry ought to primarily rely on domestically invested enterprises. For foreign-invested enterprises, the key is to select the most competent management team to manage the business in China rather than simply depend on favorable policies like tax reduction, etc., from the government as this will not be healthy in the long term.
2.2 Recent policy highlights
（1）A circular on “Management Measures for the Foreign Exchange of Venture Capital from Non-legal Foreign Persons” is expected to come out around the National Holiday.
Mr. Sun said that the major problem for Decrees No. 11 and No. 29 was that the State Administration of Foreign Exchange did not supply the subsequent explanation in a timely fashion. One reason is that departments, including the Ministry of Commerce, are drafting measures on the cross-border stock exchange activities of Chinese-based enterprises. As no consensus has been reached on this, regulations cannot be issued early enough. Another reason is that the State Administration of Foreign Exchange planned to amend both decrees and replace them with one circular. This circular will mainly state that companies set up for special business purposes by residents in China will have to register at the State Administration of Foreign Exchange. This circular provides more clarified regulations on non-incorporated enterprises, including exit, profit remittance, transferring capital back to China after being financed overseas, etc. It allows enterprises to be better informed of where to go through relevant procedures. Mr. Sun also revealed that the first drafts of the two amended Decrees have been finished and were passed in a staff meeting.
（2） “Administrative Measures on Venture Capital Investment Fund” are about to come out
According to Jianjun Liu, Deputy Director of Department of Accounting and Finance at the National Development and Reform Commission, in March 2004 the Commission and 10 ministries and commissions under the State Department began to draft “Administrative Measures on Venture Capital Investment Fund”. Currently, the Measures have been jointly signed by the 10 ministries and commissions and were submitted to the State Department on August 15. Hopefully they will be promulgated soon.
○1 The policy covers both domestic and foreign-invested funds in the category subject to adjustment
○2 The major content of the new policy: one is to adopt legal and institutional innovation to provide particular legal reference for venture capital funds. The Company Law only regulates the paid-up capital system, which is not applicable to the operations of venture capital funds. Venture capital investments, however, take the form of a promise system. According to the new regulation, the initial amount of capital for venture capital funds is reduced to 200 million Yuan and the rest of the capital can arrive in the following three years. In the meantime, these Measures allow investments via special equity methods such as preferred stock that can be voted on (reserved in the Company Law, subject to regulations from the State Department). The Measures will also establish a performance incentive system: venture capital funds will be able to implement performance bonus systems, etc. In addition, there are system innovations.
○3 Support mechanism
The Measures will provide legal reference for establishing a venture capital support mechanism. First, the Ministry of Finance and the State Administration of Taxation have agreed to exempt income tax for venture capital firms, which solve the double taxation problem of venture capital companies. It will also encourage investors to invest in high-risk projects via giving tax deductions to venture capitalists.
Second, the means of financial support for venture capitalism from the authorities will change. The local department of finance will support venture capital companies, but they will not be allowed to undertake direct investment. They can set up directional funds to direct private capital towards venture capital firms by exerting the leverage amplifying function of capital from the Department of Finance. The government can consider sending directors and adopting a “one vote veto system” to ensure that entrepreneurs do not embezzle capital to speculate on stocks and real estate. This will not interfere with other affairs of these companies.
Third, the Measures will ensure the gradual establishment of a relatively developed venture capital system. Presently, China has made a remarkable step forward in this aspect, but it has confronted considerate difficulties while launching the Growth Enterprise Market. Under these circumstances, it is better to bring out relevant policies such as a venture capital investment fund and taxations policies, etc., to support the development of venture capitalism before launching a GEM. For instance, the National Development & Reform Commission expects the China Insurance Regulatory Commission to allow insurance funds to enter the venture capital market. This will certainly take much more efforts.
（3）Two starting points for the equity division reform
Dr. Long discussed the following considerations of the Shenzhen Stock Exchange on developing the SME Board.
○1 The SME Board made its debut as an experimental reform on equity division. At present, 10 listed companies have successfully launched on the board. The 10 listed companies on average provide 3.78 bonus shares per 10 shares, following which, the share prices have not dropped like the Main Board market, but increased by 22%. The overall reform scheme for the remaining 40 companies will kick off soon. If everything goes smoothly, the equity division reform of the SME Board will be completed in November 2005.
○2 Due to the equity division reform, IPOs have been suspended. When the SMEs complete the equity division reform, old and new enterprises will be completely divided and they will be the first to issue new stock.
○3 Thoughts on how to accelerate the development of the SME Board are as follows. First is to adopt measures to gradually expand the scale of the SME Board. According to experiences in foreign capital markets, the number of listed firms in the second board market tends to exceed the number in the Main Board Market. Second is to press forward with innovation. After the separation of the old and new, the listed firms on the SME Board will be able to refinance and consider the “express way”. Third is to continue to implement stringent supervision. Supervision serves as the lifeline for the SME Board. As the vast majority of enterprises from the SME Board are private enterprises, they depend more on supervision. Fourth is that the Party central committee and State Department are placing a great emphasis on the innovation system. Determining how to realize the integration between capital and technology is a critical task for Shenzhen Stock Exchange. On the top of the priority list, the private placement issue needs to be solved; otherwise, other outside dealings will be impossible.
III. Wrap-up speech by Prof. Cheng
Professor Siwei Cheng, Vice Chairman of National People's Congress, mainly addressed the following two aspects in his closing remarks.
1. The current policy environment of China’s venture capital industry has improved to some extent and there are good signs.
1.1 Aggressively develop the innovation economy
Professor Cheng highlighted that China has formulated a mid- and long-term development plan and has clearly indicated that it will vigorously develop independent innovation and venture capitalism. China has become the engine for the world’s economic growth. Although China’s GDP only accounts for 4% of the world’s GDP, China contributes to roughly 20% of the world economic growth. China is lagging behind the world in knowledge and lacks its own intellectual property. We have to overcome this gap through our own efforts. Every country will have to go through this process and establish their own innovation system. There are three types of innovation: one is absorption, digestion and innovation after the introduction of technology. For instance, all cell phones in South Korea are CDMA. The country’s CDMA technology was introduced from U.S, but through continuous R&D South Koreans presently own various patents on it. Another type is integrated innovation, which applies existing technology to new products. This type of innovation also imposes a critical effect on economic development. The third type is sheer independent innovation, which entails tremendous amount of R&D and involves various types of work. One example is that China produces a considerable quantity of DVDs, but the patent fees accounts for a substantial amount of the production cost; we also manufacture a significant number of computers, but we have to use Intel’s chip and Microsoft’s operating system. To develop our own chip and operating system will not be an easy task, as it needs significant amount of input. At this stage, we can only work on prioritized projects. With regards to 3G standards, we have TDCDMA from Datang Telecom and CDMA2000 and WCDMA from overseas to choose from. China Mobil might choose WCDMA, China Telecom might choose CDMA 2000, whereas the market for TDCDMA is the smallest. If we really adopt the standard from Datang Telecom, there is still a long way to go. Yet the government cannot mandate the use of that standard; it can only encourage enterprises to adopt domestic standards.
Professor Cheng stressed that venture capital is the combination of actual capital and knowledge capital. Actual capital is employed to purchase knowledge capital to create value. Knowledge capital is virtual capital, which does not have a fixed value before it is liquidized. That is to say, it will only carry a value after liquidity. For this reason, the influence of actual capital should not be overlooked. We can only genuinely help transform innovation results into value by integrating both.
1.2 The issue of venture capital funds
Prof. Cheng said that when the National People’s Congress started to make Fund Act, they once considered including securities investment funds, industrial investment funds, and venture capital investment funds. However, they encountered tremendous difficulties. When they finally endorsed the law, the Investment Fund Act turned out to be the Securities Investment Fund Act and the other two could not be pursued as people worried that it might be too risky. Lately, the senior management of the Central Bank has changed their opinions on private placement. Prof. Cheng believes that pushing forward the legal constructions of funds is a must. Presently, as there is no law in this regard, many funds are being established overseas and then entering the domestic market. Meanwhile, domestic saving has reached over 10 trillion. If part of this capital can be transferred into venture capital funds, it will definitely stimulate the development of the venture capital industry.
1.3 Amendments to the Company Law
The amendments to the Company Law were reviewed for the second time by the National People’s Congress in August, and many of the amendments are favorable to venture capitalism. For instance, the amended law relaxes the restrictions on the registering of companies and allows capital to arrive in several installments, reduces the percentage of actual capital from 80% to 30% (an increased investment in intangible assets from the original 20% to 70%), and cancels the 50% restriction on overseas investment in the company’s net assets. However, the above amendments will not take effect until they are approved by the third review of the National People’s Congress.
Prof. Cheng also indicated that there are still some problems with and different opinions on the development of the venture capital industry, such as in relation to the GEM. Hence, we should launch GEM as soon as possible. Judging from the current circumstances, however, China’s stock market is suffering from stagnation, and the relationship between demand and supply has to be carefully considered. No solution will work without increasing capital. The more than one-year operation of the SME Board has strengthened people’s confidence in the launch of a GEM.
2. There are still many difficulties in establishing a developed China venture capital system
Prof. Cheng indicated that China is now in transition from a planned economy to a market economy and we do not have sufficient experiences in many aspects of the market economy. We have been learning from overseas countries. However, argument should not stand in the way of the development of the entire venture capital industry. When China first introduced the stock market, Deng Xiappeng once said ’try audaciously, just look, don’t argue. If it does not work out, close it down’. In all these years, although we have encountered many difficulties, we have managed to push China’s venture capital industry along and every single step of its development has been accompanied by hardship and difficulties. Compared with 1998, China’s venture capital sector has made significant headway. Apparently, it is a tough job to establish a relatively developed venture capital system in only 10 years’ time, and it looks like it might take a bit longer.
In the end, he pointed out, we should not count on theories to convince the government, but performance. Without good performance, nobody will be willing to invest. Like China’s stock market, there are not many good stocks worth investing in, which, as a result, affect the development of the overall stock market. Therefore, practitioners should convince officials and the departments concerned with good performance to gain their support. As Deng Xiaoping said, practice is the only criteria to test truth. We should strive to strengthen practice, and actively explore to win support from the public, investors, and various levels of government officials with better performance to ultimately propel the development of the venture capital industry.