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Chinese authorities to promote Venture Capital Enterprises
The authorities in China are considering changes to certain regulations
to promote foreign investment in venture capital. These expected
changes will lead to privileged treatment for venture capital enterprises
in respect to taxation and allow foreign investors to enter venture
capital enterprises using the name of limited liability partners.
In August 2001, the Ministry of Foreign Trade and Economic Cooperation,
the Ministry of Science and Technology and the State Administration
for Industry and Commerce circulated the Provisional Regulations
on Establishment of Foreign-Funded Venture Capital Enterprises.
This (conditional) regulation's main goal is to set criteria for
the engagement of foreign organizations in venture capital investment
in China. Furthermore, the regulations went on to define the procedures
of examination and approval, the investment and quit mechanisms
and supervisory principles.
The provisional regulations will be amended to meet the capital
demand for enterprises, especially technology-intensive ones, and
to persuade more foreign investors into the venture capital market.
The modifications will target three specific areas:
- the reduction of the minimum capital investment required;
- preferential treatment in taxation offered, allowing venture
capital enterprises to enjoy a preferential income tax rate
of 10 per cent; and,
- foreign investors to be permitted entrance to venture capital
enterprises in the name of limited liability partners.
Confusion now exists in the market quit mechanisms of venture capital.
Some are of the opinion that without a growth in the enterprises
market, venture capital will be unable to quit. However, the quit
of venture capital through stock markets only amounts to 46 per
cent of the total, even in developed countries. The bulk of the
venture capital quit through the transfer of equity and buyback.
Currently, a smooth channel for venture capital quit in China exists
and through regular procedures of examination and approval, foreign
venture capital investments may be cashed and mailed abroad safely
and quickly.
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Pressure on to cut bank interest rates
Pressure to cut bank interest rates is rising once again, though
China's central bank is more likely to increase the money supply
and loosen regulations on lending rather than make a ninth consecutive
interest rate cut since 1996.
"Deflation has become a major threat to the sound macroeconomy
now, and an interest cut could become an efficient tool to fight
it," said Xu Hongyuan, deputy director of the State Information
Centre, a major government think-tank.
Xu's remark came after the Consumer Price Index (CPI), the major
indicator of inflation, registered a year-on-year drop of 0.8 per
cent in the first five months of this year, a declining rate 1.9
percentage points higher than that of the same period last year.
Consumption is considered the major factor for stimulating internal
demand, which policy-makers anticipate to be the main engine for
China's economic growth.
At the 16th National Congress of the Communist Party of China scheduled
for September, top policy-makers are expected to set out the country's
future development goals, and making stable economic growth a priority
is widely expected.
"At the upcoming 16th National Congress, policy-makers are not
likely to let deflation impact the steady economic growth, which
makes the need for another interest rate cut more urgent," Xu told
Business Weekly. China's gross domestic product (GDP) grew more
than 7 per cent in the first five months of the year, and excluding
the CPI, economic indicators including investments and exports registered
robust increases. Yet exports, which grew 13.2 per cent in the period,
could be curbed by the slow recovery of the world economy, which
has been shadowed by Wall Street scandals involving Xerox Corp and
WorldCom, the second largest telecoms operator in the United States.
The central bank People's Bank of China (PBOC) has stayed quiet
on the issue, though in May, PBOC Vice-Governor Guo Shuqing hinted
that after the rate cut in February, another similar move was unlikely.
Compared with the reserved attitude of monetary policy-makers, debates
among economists are heating up.
After the eighth straight rate cut, which many economists said
had "poor effects," many are now questioning the feasibility of
a ninth one. "The poor CPI, or residents' diminishing consumption,
is a result not of high bank interest rates, but of the slow growth
of income," said Zhong Wei, director of the Financial Research Centre
under Beijing Normal University. With the February rate cut, China's
benchmark one-year renminbi depository rate stands at 1.98 per cent,
and after deducting the interest income tax amounting to 20 per
cent, the rate falls to 1.584 per cent. Despite the low rate, individual
bank deposits are growing rapidly, with the total surpassing 8 trillion
yuan (US$960 billion) in June for the first time. "Can you bet on
residents to enhance spending after their income from bank deposit
interests is further reduced?" Zhong said during an interview with
Business Weekly.
According to economists, the previous eight rate cuts have not
helped China's State-owned enterprises (SOEs) - employers of a vast
portion of the population - shake off their difficulties, though
they have reduced 270 billion yuan (US$32.5 billion) in loan interest
for them. "As for promoting economic performance, the effect of
an interest rate cut is inferior to increasing the currency supply
and loosening loan requirements to stimulate enterprise investments,"
Zhong said.
Statistics show that by the end of May, the amount of loans borrowed
from China's financial institutes reached 11.8 trillion yuan (US$1.4
trillion), rising 11.4 per cent year on year. Though loans are not
growing as fast as bank deposits, they have risen considerably from
the same period last year. Xu from the State Information Centre
maintained that the growth in loans is largely a result of the interest
rate cut made in February.
China's current loan interest rate, whose level is consistent to
the deposit rate, is 5.31 per cent. Together with the minus 0.8
per cent CPI and 30 per cent range banks are allowed to float upward,
the actual loan interest is more around 7 per cent. In comparison,
the listed enterprises in China, most of whom have a higher profit
rate than unlisted companies, recorded an average profit rate of
only 6 per cent last year.
(Source: China Legal Change, July 2002)
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