Overseas venture capital (VC) firms are calling for more government efforts to create a sound regulatory environment to boost the domestic VC market, which is regaining momentum after the SARS outbreak.

That was the message yesterday at the annual general meeting of the China Venture Capital Association (CVCA) in Shanghai, a trade organization that has over 80 member firms collectively managing over US$100 billion in private equity funds.

A hot topic at the conference was the need for an effective exit mechanism, regarded as an important part of the expected regulatory environment, for many venture capitalists generally resort to public listings or takeover agreements to cash in on their investments.

Calls for the establishment of a growth enterprise board, or second board, on the domestic stock market have intensified, given the growing interest of VC firms to get more involved in the booming Chinese economy.

"I believe it's now the right time to set up such a second board," said Hugo Shong, senior vice-president of International Data Group (IDG) and also Asia president of IDG Technology Venture Investment.

It is a natural need as the threshold is often too high for start-ups to go public on the domestic mainboard stock market and access to overseas listings is still limited, according to Shong.

In related developments, foreign VC firms are showing increasingly strong interest in the Chinese market.

"VC investments on the domestic market will scale up substantially in the coming years," said Chang Sun, managing director of Warburg Pincus Asia LLC.

What mainly appeals to the venture capitalists is the business viability and potential of quickly-rising domestic private enterprises.

Also, China's ongoing restructuring reform of State-owned enterprise (SOE) ownership to divest State holdings will bring abundant business opportunities, according to Sun.

According to latest statistics of Zero2ipo.com Ltd, a major professional venture capital market researcher in China, 66 Chinese companies attracted US$379 million worth of investments from VC firms during the first six months this year, a 46 per cent growth on a yearly basis and reaching 89 per cent of last year's total.

Foreign VC firms poured US$277 million, or 74 per cent of the total investments in the first half, according to Zero2ipo.

Analysts believe the major driving force behind the increasing foreign VC inflow is the combination of China's robust economic growth, the shift of high-tech manufacturing from the US to China and the rebound of high-tech stocks on the US NASDAQ stock market.

"We believe the total VC investment this year would exceed US$500 million," said Sun of Warburg Pincus. The figure was US$418 million in 2002.

However, it's just such rosy business prospects that make the foreign venture capitalists more keenly feel the need for an easier regulatory environment for their operation in China.

The government still has a lot to do in that regard, which will eventually further buoy China's economy and much-needed technical innovation to increase its overall core competitiveness in the global economic community, said an executive of an overseas VC firm, who did not want to be named.

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