The CSRC's “No Objection” Letter: Continuing Uncertainty for Venture Capitalists Looking to Exit from PRC Investments through the Hong Kong Capital Markets

Article by Michael G. Chin and Barbara W.K. Mok

One of the biggest deterrents for investors looking to put venture capital into China is finding a suitable exit from their investment. With the continuing absence of a domestic growth enterprise market suitable for listing small to medium-sized high-tech companies, Hong Kong's GEM board should represent one of the more viable avenues of exit for venture capital investment in PRC enterprises.

Unfortunately, the Hong Kong Stock Exchange's reliance on the blessing of regulators in China continues to bring uncertainty for private equity investors looking to access the Hong Kong capital markets.

Currently, Hong Kong Exchanges and Clearing requires a "no objection" letter from the China Securities Regulatory Commission ("CSRC") before allowing the listing of a non-PRC company in Hong Kong.

Venture capitalists are usually only willing to put their money into a company if there is a clear route to getting it out again.

Many are prepared to wait for years, but they have investors of their own who, knowing the high risk involved in venture capital funding, want to be sure that at some time, the money is coming back. Without a clear method of realising investments, the amount of venture capital flowing into China's cash-hungry enterprises will continue to be limited.

The obvious home for the enterprises would be China's own markets in Shanghai and Shenzhen, but regulators favour the state-owned enterprises over those which have come up through the private sector. Happily, this now appears to be changing, and an increasing number of private companies are being listed on China's stock exchanges.

Regulators have recognised that the long-term prospects of the former SOEs are usually limited, posing a threat to investors who could find themselves left holding stocks in moribund companies. The outlook for successful private companies to keep markets growing is much brighter.

The number of listed private companies has now reached 200, still only 15 per cent of the total, and there is still resistance among some politicians to allowing private companies to become too much of a force on the stock markets - so once again, an exit route is blocked, or at least, narrowed.

The opportunities for investment by foreign venture capital companies has also been restricted, but there are signs of relaxation and rule changes that could open up the market. Early in September, reports began circulating in Beijing of...