Venture capital investment in China (Chinese VC) plunged by 43% to $165 million in first-quarter 2005, hit by legal uncertainties that a foreign exchange regulation created, according to a survey by Beijing-based consulting firm Zero2IPO Ltd.
A total of 28 VC investors sank $165 million into 35 Chinese companies in the first quarter, of which 80% were located in Beijing. That’s down from $285 million registered in the fourth quarter of 2004 and marks a decline from the torrid investment activity of the previous four quarters, Zero2IPO said.
VC funding has dropped as investors await clarification from the Chinese government on how it will implement a new policy under which Chinese investors must register all previous and new offshore transactions. VC experts said confusion about the measures is causing hesitation among potential Chinese investors, who often use offshore vehicles as a means of investing within China.
“We’ll have to wait and see,” said an executive with a leading Chinese venture capital company. “It will have negative impact on all businesses involving offshore transactions.”
Telecom-related businesses and the services industry accounted for 45% and 32%, respectively, of the first-quarter total, Zero2IPO said.
The largest investment of the quarter was the $37 million third-round financing of Beijing-based Harbour Networks Holdings Ltd., a provider of Internet protocol-based data networking equipment. It received money from existing shareholders Warburg Pincus and DragonTech Ventures Ltd. and new investors TVG Capital Partners and Singapore’s Temasek Holdings Pte. Ltd. Zero2IPO would not comment on other specific deals.
The State Administration of Foreign Exchange announced the new policy in January and released further details in April. But it has not yet revealed what procedures investors must follow to receive official clearance for foreign exchange-related transactions. Moreover, the agency has yet to win approval for its new regulatory regime from the Ministry of Commerce, which oversees cross-border investment activities.
By Shu-Ching Jean Chen in Hong Kong
Source: The Deal
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