Chinese Private Equity

Abstract

Benefiting from sustained economic reform and a vast, talented, and cost-effective labor pool, China is growing at a breathtaking pace. Many economists project China will account for 25% of world GDP within 25 years. Private equity funds have recognized this paradigm shift and are deploying dramatically higher sums to China. Private equity funds raised almost $16 billion for Chinese investments in 2005, compared to only $2.5 billion in 2004. Despite this dramatic surge in investment, barriers to Western investment remain. Chinese government pronouncements can complicate the investment horizon. While the more benign SAFE Circular 75 supplanted rather unsettling Circulars 11 and 29 before the end of 2005, foreign investors should expect periodic regulatory surprises. For example, taking effect in early 2006, Measure 39 provides subsidies and incentives only to domestic venture capital funds. Despite the challenges of a continually evolving investment landscape, leading Western venture and buyout funds will continue to make China an increasing part of their global investment strategy.