BEIJING, April 11 -- China's struggling venture capital (VC) industry is expected to step out of the shadows with a relaxation of legal requirements.

    The country's first provisional regulation for the management of VC firms, which is at the final approval stage, will be announced soon, said Liu Jianjun, an official at the National Development and Reform Commission.

    The new regulation will give firms greater independence from the government, and will fundamentally change the government's role from a major investor in many Chinese VC firms into a smaller shareholder or a financing guarantor, he noted.

    It will also provide a legal foundation for the entry of social funds, including banking funds and insurance funds, into the VC system, and for the development of an independent second board in the stock market, he said.

    While introducing preferential tax measures into the industry, the regulation will also try to offer solutions in terms of legalization of private equity, option investment and bonus arrangement.

    "No single law could solve all the problems in the VC industry, but as long as you tackle the core issues, other problems may also be solved," Liu said. He made the statement on Saturday at the seventh China Venture Capital Forum, an annual meeting linking policy-makers with VC practitioners and for the exchange of ideas between the foreign and domestic VC communities.

    Cheng Siwei, vice-chairman of China's National People's Congress (NPC) Standing Committee, dubbed "Father of China's VC industry", said the revision to the Company Law will be favourable to VC firms.

    The previous limit on trading technology or intellectual property for shares stood at 20 per cent, but this is expected to be lifted.

    "Because of the limitation, quite a lot of promising technology owners gave up on domestic VC firms and sought partnerships with foreign VC firms for bigger stakes," said Cheng. "Hopefully, the percentage of shares for technology and intellectual property could be raised to 70," he added.

    The revision, which went through first reading in the legislative body in February, has not yet been finalized.

    China's VC industry has grown slowly. Of the registered 400 or so VC firms, only half are active in investment, managing about 50 billion to 60 billion yuan (US$6.03 billion to 7.2 billion), according to Cheng.

    (Source: China Daily)

    However, foreign VC investors, having experienced an industrial slowdown from the peak in 2000, regained momentum in investing in China, with these investments accounting for 75 per cent of the total.