In late 2008, China’s central government issued a set of opinions to guide the establishment and operation of government-backed startup investment channeling funds. The opinions are titled the “Guiding Opinions on the Orderly Establishment and Operation of the Startup Investment Channeling Funds” (the Opinions), which were issued on October 18, 2008, by the National Development and Reform Commission (NDRC), the Ministry of Finance (MOF), and the Ministry of Commerce (MOFCOM) of the PRC.
The Opinions are in accordance with the Interim Administrative Measures of Startup Investment Enterprises (the Interim Measures). The central government issued these Interim Measures to regulate the development of startup investment channeling funds (Channeling Funds) in light of their fast growth and the problems they manifested and encountered during management and operation. The Interim Measures provide that state and local governments may set up Channeling Funds to facilitate the establishment and development of enterprises that invest in startups (SIEs) by investing capital or providing financial guarantees.
Since the Interim Measures took effect in March 2006, governments at various levels in different regions of China have set up a number of Channeling Funds. For instance, in September 2006, the government of Haidian District of Beijing set up a 500 million RMB Channeling Fund in Haidian Science Park, an area often dubbed as “China’s Silicon Valley.” Shanghai’s Pudong New Area also has a similar Channeling Fund. In July 2007, MOF and the Ministry of Science and Technology started a national Channeling Fund to promote investment in science and technology startups.
According to the Opinions, the Channeling Funds are policy funds set up by the government but operated by market rules. They serve as a tool to channel non-government capital into investments in start-ups by supporting SIEs, but the Channeling Funds will not directly run any startup investment businesses. The Opinions provide several ways for the Channeling Funds to operate. First, the Channeling Funds may establish SIEs together with non-government capital by making equity investments in the SIEs. Second, the Channeling Funds may provide financial guarantees to SIEs with good credit records to help them get debt financing. Third, the Channeling Funds may make follow-up investments in the enterprises in which SIEs invest, provided that the enterprises are in the rudimentary stage, they are high-technology startup enterprises, or they are encouraged by the government.
The Opinions provide that the Channeling Funds are to be set up as independent legal entities and the Channeling Funds’ finance sources may include the government’s special funds; the Channeling Funds’ incomes from their investment and guarantee activities; interests from bank deposits and treasury bonds made or purchased with the unused balance of the Channeling Funds; and donations from individuals, enterprises, and other non-governmental institutions.
Under the Opinions, the Channeling Funds may manage the Funds’ operation by themselves, or hire qualified management agencies for this purpose. A qualified management institution must be an independent legal entity, having management teams with certain professional experiences, having good financial standing within the last three years, and without a record of serious administrative or judicial punishment. In addition, such a management institution must manage the Channeling Funds in strict compliance with the management agreement.
In order to control potential risks, the Opinions emphasize that the Channeling Funds may not invest in the stock market, futures, real estate, funds, corporate bonds, or financial derivatives, or be used for sponsorships or donations. The unused capital of the Channeling Funds may only be deposited in banks or be used to purchase treasury bonds.