Shanghai Plan to Cover Venture Capital Firms' Losses Is Criticized
(Beijing) – A plan by Shanghai's government to encourage innovation by compensating venture capital firms for their loss has been criticized by professional investors as violating market principles and filled with loopholes.
Starting next month, venture capital firms that invested in high-tech startups in Shanghai since the beginning of last year can apply for government compensation if their investment loses money. The policy is laid out in a regulation dated December 29 that the city's Science and Technology Commission put on its website on January 21.
The payout offer is intended to encourage private VC investment to support innovation and the development of Shanghai as a global high-tech center, the document says. The policy is to last for two years.
The idea will have a "disastrous" impact on the principles of the capital market, said Andrew Y. Yan, managing partner of private equity investment firm SAIF Partners.
"A fundamental principle of the market economy is the match between risk and return," he said. "VC investments are extremely risky and limited to only a very few people and institutions. The negative consequences of using public money to compensate investment losses will be unimaginable."
Xie Zuoqiang, vice president of the PE firm Prosperity Investment, said the new policy provides no clear standards and procedures on calculating losses, leaving loopholes that can be abused to cheat tax payers' money.
He also said the two-year life of the regulation creates uncertainties because VC investments often last longer than that. "The policy may be well-intentioned," he said, "but supporting an industry is a long-term initiative."
Under the regulation, if the sale of a VC's stake in a startup fails to cover its original investment, it can ask the government for a payout amounting to 30 or 60 percent of the shortfall depending on the size and revenue of the firm it backed.
The most any VC firm can receive in one year is 6 million yuan. The limit on individual investment projects is 3 million yuan.
An investor with a financial institution in Shanghai said the city did not invent the idea of subsidizing high-risk private financial investment. Other local governments in China have implemented similar rules but none of them offer quite as much compensation, he said.
With other local governments it was more of an ad hoc arrangement, he said. "You go to the government's public finance bureau, asking for money, and they will tell you to wait as they go over their budget. Usually they'll return and say there are no funds left, so you'll have to wait until the next year and see."
The Shanghai rules said the capital for payouts will come from the city's public finance bureau, which co-authored the regulation. A committee will review and decide whether to approve a VC investor's request.
(Rewritten by Wang Yuqian)
- Where's the Beef? Getting Ready to Head to China From U.S.
- Uber China Boss Liu Zhen to Step Down
- Agricultural Bank of China's New York Branch Told to Improve Anti-laundering Measures
- China's Finance Ministry Mulls Trading in Government Bonds
- Caixin Factory PMI Edges Higher in September
- Spent-Fuel Issues Cloud China's Nuclear Push
- Domestic Cars' Quality Approaching That of Foreign Models, Expert Says
- SDR Entry Marks Beginning, Not End, of China's Arrival on World Financial Platform
- China's New Growth Model May Be Key to Tackling Global Climate Change
- China-Funded Nuclear Project in U.K. Gets Final Go-Ahead
- Sign up to receive our free daily newsletter
- WeChat Tests Feature Allowing Mobile Services Without Apps
- Forged Document Used in Soccer Team Purchase, Bank Says
- Baosteel-WISCO Merger Marks Beginning of Steel Industry Transformation
- IMF Official Expects Yuan to Increase SDR Interest Rate
- Mother's Killing Her 4 Children Reveals Cracks in Anti-Poverty Drive
- For Alibaba, India Is the New China
- Government Plans Massive Relocation to Fight Poverty
- Dongbei Special Steel Group Forced Into Bankruptcy
- Foreign Companies Still Trying to Break Into China's Investment Funds Market
- Booming Property Market Undercuts Attempts to Revitalize Industry