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China paves way for major government influx into venture capital
[HONG KONG] China's government is developing an bigger appetite for venture capital.
The State Council is encouraging more government agencies and companies to funnel money into private startups while getting the state to take part in the nation's technology boom.
In a new document published on its website Tuesday, the country's highest policy overseer urged government-led funds to play a greater role in guiding venture capital investment, while promising to level the playing field for foreign VCs.
Venture capital has proven crucial in driving the growth of a private sector long neglected by banks, and in creating national champions from ride-sharing leader Didi Chuxing to Alibaba Group Holding Ltd and Tencent Holdings Ltd.
In past years, the government has encouraged entrepreneurism to galvanize a slowing economy, and begun to play a major role in startup investment.
"With the current rate of slowdown in the economy, the Chinese government wants to have a more vibrant market and they will need more companies to mature. All that needs funding," said Hans Tung, a general partner at GGV Capital in Menlo Park, California.
"It's best that the local government guidance funds invest into existing VCs instead of directly participating in the market."
China is already a regional powerhouse in technology deals, even as global venture capital flows falter with investors growing wary about stretched valuations. Data from AVCJ Research shows that venture investments totalled US$9.8 billion in 2015, more than half Asia's total.
But that excludes an eye-popping amount of state involvement. Chinese government-backed venture funds tripled the amount under management in a single year to 2.2 trillion yuan (S$449 billion) in 2015, according to consultancy Zero2IPO Group, making it the biggest pot of money for startups in the world. Much of that was in so-called government guidance funds, in which local or central agencies play some role.
"Chinese local government guidance funds are more engaging with the VCs than the typical university endowments. They are curious, it's a new trend. They also want to showcase what they've done," Mr Tung added.
The new State Council guidelines, while light on details, outlined a broad spectrum of objectives and directed agencies from the securities regulator to national economic planner to oversee specific initiatives.
It expresses global aspirations, calling on local companies to develop VC funds that invest abroad. The cabinet urged state firms to invest in venture capital or set up their own funds, and said it will consider letting local government financing vehicles, which borrow on behalf of local governments often barred from doing so, to upgrade to venture capital companies.
It wants to improve the environment for VC exits by establishing startup-friendly stock market boards. And it promised to level the playing field by easing entry for foreign VC firms.
"Venture capital is an important method of improving investment structures and increasing effective investment," the State Council said. One aim should be to "promote China's venture capital industry to among the world's most advanced".
Also on the list was the prevention of investment bubbles and illegal fundraising, major risks in a country where mom-and-pop investors tend to dominate stock market trading and often use their smartphones to invest more than US$1 trillion in personal savings.
"It's very ambitious," said Victor Shih, a professor at the University of California, San Diego who focuses on Chinese politics and finance.
"But down the road there might be very serious losses, and it's government money, so tax payers will take a loss," he said, referring to the country's broad ambitions for venture capital.