China wants to boost technology through venture capital investment

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China is planning to introduce new measures to attract venture capital (VC), including funds based abroad, into the country’s tech sector, according a notice by the State Council, or national cabinet.

The council’s notice, published on Wednesday, cited the experience of foreign investors in investment and their service strengths as reasons to encourage the creation of yuan-denominated fund in China.

The council said that the management of forex will be “optimised”, making it easier for business entities and VCs to handle transactions.

State-owned enterprises that invest in industry leaders with advanced technologies will be supported when they issue corporate bonds or debt financing instruments. China will also support the insurance institutions that invest in VC funds.

The cabinet stated that “developing venture capital is an important step in promoting the virtuous circle of technology, industry, and finance.”

Venture capital is also being affected by the fragmentation of global supply chains.

Alex Capri

According to the council, China also plans to expand the pilot programme for Qualified Foreign Limited Partnerships and guide foreign institutions in conducting cross-border investments within the scope of regulation.

The mechanism enables foreign investors to invest in the private equity market of China, a previously exclusive activity for domestic parties.
The notice follows a rare meeting last month between President Xi Jinping, and prominent entrepreneurs. According to the Communist Party media outlet People’s Daily, the leader asked why there were fewer unicorns – new start-ups worth more than US$1billion.

Alex Capri, a senior professor at the National University of Singapore, said that despite state-driven initiatives aimed at attracting more foreign VCs to Singapore, geopolitical factors will make it difficult for this task.

Capri stated that “as global supply chains fragment due to decoupling efforts and de-risking, the venture capital industry is also experiencing the same restrictions.”

Last year, US venture capital fund Sequoia Capital divided its business in order to avoid the possible fallout of worsening bilateral relationships, creating an independent Chinese entity.

Capri said that the US Outbound Investment Transparency Act (which requires US entities to inform the federal government about investments in sensitive technology in “countries concerned”) has created a roadblock for investment in China.

Different data points indicate a decline of China’s unicorn firms. The number of VCs and the size of their total investments have also been declining.

According to the Hurun Global Unicorn Index for 2023, China will have 56 new unicorns, down from 107 in 2020.

In 2023, 8,322 new funds will be established on the VC and PE market in China. According to a report released on June 9 by CVINFO Institute, an arm of Beijing-based China Venture Investment Consulting, this was a decrease of 4.7% from the previous year.

In 2023, the total amount of newly established VC funds in China was US$614 billion. This represents a 9.4% decrease year-on-year and a second consecutive decline.

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