The venture capital (VC) business on the mainland has shown signs of recovery after making its debut on the mainland not long ago.

As the domestic stock market, including the newly-opened SME market in Shenzhen, is still coping with cumbersome difficulties inherited from the planned-economy era, some Beijing-based observers say that overseas investment and listing will continue to be the main channel for entrepreneurs and investors.

In the next few years, we will probably see a marked increase in the amount of VC on the mainland - concentrated not just in IT but in all high-growth industries, a fund manager said in a recent interview with China Daily. VC investment showed more than 31 per cent annualized growth, reaching US$438 million in the first half of 2004, according to a recent study carried out by Tsinghua University, the mainland's most well-known engineering school. The VC was directed to a total of 80 mainland-based or related companies, according to the Zero2ipo-Tsinghua VC Research Centre. Just a decade ago, the term "venture capital" was still a mystery to most mainland business people and only took root during the the Internet boom in the late 1990s.

Today, some of the most well-known mainland VC operators include IDG from the US, Japan's Softbank and an investment vehicle backed by the Singaporean government. Hong Kong has played only a limited role in the industry, according to mainland fund managers. At the same time, there were also a record number of investment opportunities, totalling more than US$200 million over 36 projects including 11 IPOs.

Apart from the 11 successful IPOs, there were nine enterprises listed in the stock markets of the US, Hong Kong or Singapore, according to the weekly newspaper The Economic Observer.

Among the projects that received funding, IT (information technology) - mainly the tele-communications industry - was the most popular, followed by IC (integrated circuitry), more traditional industries and Internet services. In terms of actual capital, IC led IT to be the largest recipient (28.34 per cent) of funds, followed by the Internet (26.68 per cent), and then IT (18.52 per cent).

The IC sector had already received quite a large amount of VC last year and has continued to be the focus of investor interest in 2004. In the last three years, Tsinghua's researchers found, IC design received around US$2 million per project. But in the first half of 2004, the sector received more than US$6 million per project - this is even without including the industry's largest VC commitment to Datang Micro-Electronics.

Mainland VC funds were also able to attract more money. Five of them absorbed a total of US$170 million, more than 70 per cent higher than over the same period last year - although there was some exceptional growth in the second half of last year which the industry may not be able to match in 2004.

Although according to Ni Zhengdong, head of Zero2ipo/Tsinghua VC Research, there is still a chance that the mainland's total VC commitment will reach US$1 billion and exceed its 2003 record.

Whether or not that milestone is reached, industry experts say, the fact remains that since the second half of 2003, many of the VC funds backed by foreign investment have increased the amount of investment or investment activity on the mainland and many firms have already set up offices there.

The researchers also forecast that in the coming months, VC will continue to be directed into tele-communications, software, semi-transistors and IT services.

VC is also finding its way into other industries, most noticeably bio-engineering and pharmaceuticals, as well as new energy sources.

(HK Edition 08/10/2004 page18)