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China Issues New Incentives For Venture Capitalists

by Mary Swire,, Hong Kong

17 November 2005

The Chinese government has issued new rules aimed at encouraging venture capital investment in the country's small- and medium-sized enterprises, and is due to announce new tax incentives for the sector.

According to a statement on the website of the National Development and Reform Commission, the new rules have been approved by the State Council and will go into effect in March 2006.

"We need to promote the development of venture capital companies, regulating their investment and encouraging them to invest in small- and medium-sized enterprises, especially high-tech SMEs," explained the statement, which was issued jointly by ten government bodies, including the NDRC, the Ministry of Finance, the Ministry of Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the People's Bank of China.

The new rules establish a 30 million yuan (US$3.7 million) market entrance threshold for venture capital firms. At least 10 million yuan of this must be paid up front and the rest turned over within five years.

The guidelines also sets out a framework of how venture capital firms can use money, which will permit them to park money in bank deposits, buy stakes in non-listed firms, and invest in certain fixed income securities such as treasury bonds.

The authorities have also stated that the government intends to encourage investment by venture capitalists in SMEs through a favourable tax structure, although the rules have yet to be finalised by the finance and tax departments, and the State Council.

In the first half of last year, the latest period for which figures are available, venture capital companies invested US$438 million in China, a 31.86 percent increase over the year, according to Beijing-based consultants Zero2ipo Ltd.

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