China's first major policy response to its VC crisis

Chinese financial regulators are dealing with multiple inter-connected and sometimes conflicting tasks at the same time

2 months ago, I wrote an article about China’s dying VC industry. More than 150,000 people have since read the original Chinese version, while the English version has ranked among the most popular articles in this newsletter.

What I wrote about is nothing revolutionary. The fact that it went viral showed it resonated so well with the visceral experience of many people. My takeaway from creating this viral article is that it’s not really me who made it viral, but a collective emotion that has been brewing for quite some time, and it only took a small spark from me to ignite the fire. And this fire - the public reception of this article, rather than its actual content - is proof in itself that China’s venture capital has indeed met some serious trouble.

However, the Chinese government has not chosen to “lie flat”. Since my article, there has been a wave of high-level policy announcements about this topic, progressing from the very top all the way down to detail policy pronouncements.

On April 30th, the Politburo met to discuss the dates for the 3rd Plenum of the 20th Party Central Committee. During that meeting, “venture capital” was specifically mentioned as something to be supported, and the term “patient capital“ made its very first debut in a top-level official document. (This is also the key term I unwittingly used in my article several weeks before then)

On May 23rd, President Xi hosted a symposium held in Shandong Province on the topic of reform. During that symposium, Xi famously asked: “What’s the main reason for the declining number of new tech unicorns from us”?

On June 11, Premier Li Qiang hosted a State Council executive meeting to discuss about supporting venture capital:

Developing venture capital is an important measure to promote a positive cycle among technology, industry, and finance. We must optimize support policies around the entire chain of "fundraising, investment, management, and exit," encourage long-term investments by insurance funds, social security funds, and others, actively attract foreign venture capital funds, broaden exit channels, and improve policies on mergers, acquisitions, and share transfers to create a favorable ecosystem for the development of venture capital. It is essential to implement differentiated supervision tailored to the characteristics of venture capital, refine tax incentive policies, support the development of professional institutions, manage the relationship between government funds and market funds effectively, and fully leverage the role of venture capital in early-stage investments, small-scale investments, and hard technology investments.

This string of policy messagings culminated in the policy document announced by the State Council on June 15 “促进创业投资高质量发展的若干政策措施 Several Policy Measures to Stimulate High-Quality Development of Venture Capital”. It has 6 big chapters, so I will call it the “6 VC Measures”.

In today’s post, I will explain to you what I think are the three most consequential sections of the “6 VC Measure”, namely: 1) where to find patient capital, 2) a more scientific approach towards risk and responsibility for fund managers, and 3) improving exit channels for venture capital investments, and whether such a policy response will be sufficient to move the needle.

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