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Startup fund to allocate assets more widely

Updated: Jan 15,2015 10:08 PM

The State Council’s decision on Jan 14 to establish a 40 billion yuan ($6.45 billion) investment fund to support startups in emerging industries comes at the right time, but follow-up efforts are still required to ensure the fund works, experts said.

Born out of necessity

Xu Hongcai, an economist at the China Center for International Economic Cooperation, told China News Service that the government-led fund will help allocate resources more rationally in a wider area.

The development of emerging industries is currently inadequate due to regional economic competition and the small size of existing local investment funds, Xu said.

Xiao Bing, president of venture capital firm Fortune Capital, agreed, saying it is necessary for the central government to set up such a fund.

“Investment funds created by local governments always require the nongovernment investors to engage in local industries, but such cooperation might be halted due to the lack of appropriate projects,” Xiao said.

According to a report by Beijing-based Zero2IPO Research Center, among the existing 29 provincial-level investment funds, only 15 percent enjoy a capital scale that exceeds one billion yuan ($161 million). The size of such funds in less developed areas is small, thus failing to attract more social investment.

Effort to improve economic structure

“The government is actually delivering on the promises it made in May last year by establishing the fund,” said Xu.

China had pledged to double the amount of government-led venture capital for emerging industries at an executive meeting of the State Council.

It also decided to set up a national venture capital fund for emerging industries, in a bid to better ease the financing difficulties of small- and medium-sized startup enterprises.

“Besides boosting industrial upgrading, improving financial structures is another reason for the government’s growing support for the investment fund,” Shan Xiangshuang, chairman and president of China Science and Merchants Capital Management Group told China News Service.

According to Shan, the irrational structure of domestic financial capital has led to the low efficiency of capital use, causing high costs for the fundraising of small- and medium-sized enterprises (SMEs).

“Banks prefer to invest in asset-heavy and secured companies. However, the overall restructuring of China’s economy requires the development of strategic emerging industries focusing on innovation,” he said.

“Such SMEs have no asset to be mortgaged to the banks, so they have to turn to other financial organizations, especially venture capital funds”.

Follow-up work counts

“I think the public might want to know how will the fund be managed and evaluated,” Liu Rui, an economics professor at Renmin University of China, told China National Radio.

According to Liu, the follow-up work is significant in order to make the best use of the fund.

“It should be operated in a commercial way, and attract more social capital to participate,” Liu said, suggesting that it could become an open-ended fund with nongovernment investors’ participation, and be managed under a modern funding system.

Liu also highlighted the necessity of having a third party to assess companies that apply for the fund.

“The third party should decide whether the enterprises meet certain requirements, do they really need the money and how about their market prospects,” Liu said.

He added that a later evaluation on the effect of the fund is also important.

Market to play the decisive role

Zhao Xijun, deputy director of Finance and Securities Institute under Renmin University of China, told China New Service that the government should let the market play a decisive role in allocating resources.