Page 118 - How China Is Winning the Tech Race

panies public on Nasdaq or the New York Stock Exchange and realize a profit
in U.S. dollars instead of the nonconvertible Chinese currency.
Those contortions have been reinforced by a series of regulations and
guidelines from China’s Ministry of Commerce and State Administration of
Foreign Exchange in recent years that have variously tightened and loosened
the rules. Consider the fact that
WOFIs with Chinese citizen share-
“I think it will be another 20 years before holders must be registered and
China moves up the value chain and reaches approved, and most are, since
critical mass in cutting-edge technologies.” equity stakes are a key financial
motivator for entrepreneurs to
Joel Dreyfuss,
build businesses. Or think about
editor-in-chief, Red Herring
this: Chinese entrepreneurs must
pay for stock options and deposit
the proceeds from selling shares in
a start-up to foreign-currency bank accounts in the PRC. In part, the laws are
intended to make sure that China gets tax income from money made by
Chinese citizens in domestic companies. Another hurdle is immature capital
markets for taking a venture-financed company public, though rising prices at
the Shanghai and Shenzhen bourses are creating a new but still volatile exit
route. 10
Also, the long flights and “pain points,” to use a Silicon Valley expres-
sion, may not be worth it. So far, there’s not enough evidence that this latest
burst of deal making in China is paying off. Fifteen of the twenty-two Chinese
companies that went public on Nasdaq or the New York Stock Exchange in
2005 and 2006 were venture-capitalized tech firms, but most were backed
earlier this century and don’t represent the new breed of innovation
investments.
Partners at the giant New Enterprise Associates (NEA) are disappointed
that among some 18 investments in China since 2002, only 3 semiconductor
firms have gone public, says partner Scott Sandell, who leads the firm’s China
activities. NEA put a hold on China investments in midyear 2007 while it
worked through a backlog of deals ranging from online dating services to
satellite broadcasting providers. “Returns from China have been more dif-
ficult than we originally anticipated,” he says.

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