The laws that forbid foreign investors from taking profits out of the country in their own currency keeps foreign start-up capital to a trickle.

But the distrust by Chinese of the venture capital business, mainly due to the lack of a strong regulatory environment, has dampened domestic enthusiasm for start-up ventures. As a result, the government will continue to play the lead role in the venture capital business.

"In three to five years, the legal framework for the development of funds, including venture capital funds, in the country will be established," said Hua Yuda, the president of Shanghai Venture Capital Co Ltd (SVCC). "A group of talented venture capitalists will grow up and people in China will have a better understanding of venture capital investment," he said.

"By then, the government might retreat from its current role as an active participant in venture capital investment in China."

SVCC is not the largest company of its kind in Shanghai now, but it is one of the most powerful, with strong government backing.

It was established by Shanghai municipal government in 1999 with 600 million yuan (US$72.3 million) in start-up capital. Hua, now the president of the SVCC, used to be the director of the Shanghai Municipal Science and Technology Commission.

SVCC and similar venture capital companies are usually criticized by outsiders who insist that venture capital should not be managed by government.

Hua faced such chiding calmly: "People who say so don't understand the situation of China very well. Neither do they understand how such government backing is managed.

"Though the capital of the SVCC is set aside by the government, it is cutodized and managed by a group of fund management experts like the private fund."

He added that the government's involvement provides confidence to individuals and enterprises to risk their capital.

The venture capital companies in foreign countries are usually managed like closed-end funds.

Companies collect money from individuals and institutions, using capital or property of fund managers as guarantees. When the amount of money collected reaches the ceiling limit of the planned fund programme, the fund will be closed.

After three to five years investment, the fund will be settled.

Since the fund law in China hasn't yet been promulgated, no institutions or individuals other than the fund management companies approved by China Securities Regulatory Commission (CSRC) are allowed to manage funds.

The venture capital fund is no exception.

Therefore, the government is put in an ambivalent situation since it needs larger amounts of money for venture capital investment than the fiscal budget allows, to commercialize the scientific and technological research achievements.

Government money

To attract capital from other sources for this development, the government funnels money into companies like SVCC.

With the guarantee of the capital from the government, SVCC is able to attract other capital management companies to become its strategical investment partners.

So far, SVCC has established six investment companies with other venture capitalists based mainly in scientific and research parks and universities, like Shanghai Jiao Tong University, Fudan University, Zhangjiang High-Tech Park and Qinghua University.

It also joined with overseas funds, such as the US$50 million TDF China Fund and two other funds in the US.

"In those Sino-foreign funds, SVCC only covers 5 to 10 per cent of the capital. However, it can benefit us to collect overseas capital and introduce foreign venture capital into China," Hua said.

Under the current system in China, government participation in venture capitalization instills confidence in other investors that they will recoup their investment.

Experience has shown that the inconvertibility of renminbi and the poor performance of capital or assets and equity exchange markets has always made overseas venture capitalists reluctant to invest in China.

"Why should we invest if it is difficult for us to exchange the profits we earn in renminbi into foreign currencies and take out," an official from Advent International Corp, one of the largest private equity investment companies in the US, once complained.

However, Hua's company, together with government-backed investment companies, might be able to help remove that barrier to foreign investors.

"For example, if some start-ups get listed, we can apply to the Foreign Investment Commission for special approval for our overseas partner to take their profits in foreign currencies out," Hua said.

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