New Chinese government fund for venture capital has real potential to significantly promote China's domestic entrepreneurship and innovation. But if access to new funding is too easy, the main objective of the project is jeopardized.
On January 14, 2015, the State Council - The head of China's policy body - announced that it will allocate 40 billion yuan (US $ 6.5 million) to a new venture capital fund to support new startups and promote emerging industries. The notice read that the fund "comes at the right time", but "still monitoring efforts are required to ensure the fund works'. The government said the fund will come from existing government budget designated for the expansion of emerging industries . the details on how it will be managed yet to be announced. the government has referred to the possibility of including "social capital" and invite tenders from fund managers.
The aim is to promote innovation. But the success of the fund not only depend on the extent to new financing extends. Instead, it depends on the ability to pick winners among fledgling startups China, promote profitable business and profitability secure market for investors.
China's economic strategy has recently faced challenges. Abundant labor in rural interior of China has decreased, which entitles workers to demand better wages and conditions. The global financial crisis has shown that export demand for labor in China can not rely indefinitely. China is working hard for a "soft landing" from his slowing growth by improving its economic structure. The fund startup venture is the latest concrete step towards the escalation of the value chain. The desire to breed and foster sunrise industries for the future and help promote economy [China] to move towards the middle and high end 'the new background. Recent success stories like Alibaba Group, Huawei and Lenovo bright point to the ability of Chinese industry world-class innovation in global competitive markets possibilities.
China private small and medium enterprises (SMEs) are driving economic growth, but still struggle to access finance and investment. Yiping Huang wrote that the capital market in China is distorted against SMEs due to the asymmetric liberalization of factor markets in China. Product markets have been fully liberalized, but the state deflated prices of factors of production such as capital, labor and land. State banks lend at rates below market; as a result, does not lend enough to meet demand. Loans in place to rich SOEs is prioritized in assets.
The government statement said that SMEs - especially startups - have few or no assets to be mortgaged by banks, and must rely on other financial organizations, especially venture capital funds.
Venture capital market in China is small and has been limited by a number of restrictions in the past. According to research by consultancy Z-Ben capital, China has around 3,100 hedge funds with RMB388 billion (US $ 62 billion) under management, and another 2,500 private equity managers who oversee RMB1.2 billion (US $ 192 million).
Government restrictions on venture capital market are loosening. In late 2014, regulators allowed insurance companies to invest their huge pools of raw venture capital. Caixin reported recently that Anbang, a relatively small Chinese insurer, is making big inroads into private equity, raising questions about whether regulators are keeping up. 'Princes' China are flocking reportedly in the nascent venture capital industry.
The danger is that such a significant increase in the supply of venture capital 'water' for performance expectations receptor investment. Benefiting companies can develop the same disease than their larger cousins state: the inefficiency caused by easy access to government capital.
The solution to this risk is "mixed capital". The government has recognized this, and refers to the possibility of increasing the "social capital" (or actually the private capital) for the background. 'Mixed economy' has already been discussed in connection with the improved performance of SOEs. Zhao Changwen the Development Research Center of the State Council wrote that the "mixed ownership" can increase the performance of public capital. The idea is that the public capital invested in conjunction with the capital and private investors have a say in the management of assets. He Fan CASS economist said that if private investors are skeptical about whether they have management control of investment in joint venture assets, it is unlikely to invest in these companies.
The same applies to venture capital. If the State is to have any hope of achieving a successful fund "joint venture" with rates of return to attract private investors, investors need assurance that they will say in investment decisions. Investors will want to fund managers who can create winning formulas to pick-ups and innovative SMEs. They will be supported to become profitable businesses in order to make a return on your investment.
If the government can not attract "social capital", the fund can not very well become another subsidy program inefficient government, instead of an investor of goods in the future of innovation in Chinese industry.