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Shanghai Aims to Be Private Equity Hub

It’s rare to see so many big names in the industry sit together under one roof. It's also not common for Shanghai's tax, administration of industry and commerce, and securities regulators, district officials, finance services office officials and a deputy mayor to gather to encourage a fledgling industry in China.

The industry titans and city regulators are together to talk about the same topic — how to boost Shanghai's pioneer position as the hub for private equity, venture capital and hedge funds as the city is on the cusp of being an international financial hub.

At a workshop discussion on August 14, Shanghai released its guidelines on equities investment as the third Chinese mainland city vying for the equities investment center status, following Beijing and Tianjin.

"The rule is a response to the industry from Shanghai," said Tu Guangshao, Shanghai's vice mayor. "It signaled our first response and more moves will be taken in the future."

In the past, most equity investment companies have established their Chinese mainland presence as consultancy services or representative offices for liaison services, given the unclear regulation in the industry.

The industry is still awaiting nationwide rules to clarify the legal status and foreign exchange controls for the sector.

However, many have already invested in Chinese mainland companies.

Private equity firms invested US$2.56 billion into 37 Chinese enterprises in the second quarter, said Zero2IPO Research.

Venture capital, typically invested in start-up or growth companies, help build up small businesses with strong potential in the market.

Zero2IPO Research said 159 entrepreneurial firms received venture capital in the second quarter, up 31.4 percent from a year ago. Among them, 143 firms disclosed a total investment of more than US$1.2 billion, a year-on-year growth of 73.5 percent.

Venture capital is growing in China with investment totaling US$3.25 billion last year. Growth is expected to be more than 30 percent annually in five years.

"Private equity and other funds are growing rapidly in China amid the sizzling economy and the development of the domestic capital market," the document said. "Shanghai is always keen on the development of the industry."

Equity investment companies can help Shanghai shift its economy structure into advanced manufacturing and a modern services industry, Tu said.

The industry is also in line with Shanghai's endeavor to be an international financial hub, Tu, the former vice chairman of the China Securities Regulatory Commission, said.

Shanghai is gearing up to be a world financial capital. The city is already home to China's main stock, futures, foreign exchange and gold bourses. The central government set the strategic goal of building Shanghai into an international financial center in the early 1990s.

Many financial institutions, including HSBC and Citibank, have set up their mainland headquarters in the city. Pudong New Area is the main stage for attracting industry players.

Pudong plans to offer a one-off life subsidy of 200,000 yuan (US$29,197) for fund managers based in Shanghai, said Yan Xu, deputy district chief of Pudong.

The senior managers can enjoy a 40-percent tax refund and mid-level managers can benefit from similar incentives.

Such preferential tax rebates are also targeting senior management of other financial sub-industries such as banking and insurance.

Pudong is home to 73 banks, 202 brokerages and 145 insurers as it is the main stage of Shanghai's international financial hub build-up.

The district is also planning to grant a one-time bonus of 3 million yuan to 15 million yuan to equity investment companies setting up in Shanghai.

The detailed plan is still under discussion, Yan said.

"Services including smoothing the supply of office space to the industry in Lujiazui Area or in Zhangjiang High-tech Park is also in the pipeline," he said.

The district will also encourage equity investment companies to invest in state-owned enterprises and high-tech firms in Pudong to guide the industry.

"Shanghai enjoys an advantage in developing the equity investment industry," said Shen Nanpeng, founder and managing partner of Sequoia Capital China.

"Shanghai already has qualified investment targets with the cluster of high-tech start-ups."

Sequoia China has invested in 12 Shanghai-based firms, 10 of which are high-tech companies. Among them, four are based in Pudong.

Shanghai 9Diamond Jewelry Co, an online diamond jeweler, is one of the firms receiving a bail-out from venture capital firms — Qiming Venture Partners, Zero2IPO, Rapaport and Kleiner Perkins Caufield & Byers — in January.

The Shanghai online jeweler targets a listing on Nasdaq within three years, or five years at the most, after raising a combined venture capital investment of more than US$10 million from the four firms.

Fang Fenglei, founding partner & board chairman of Hopu Investment Management Co, said Shanghai can apply to the central government for more pilot programs to make further breakthroughs in the industry.

(Shanghai Daily August 25, 2008)

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