China's VC Sector Once Sized at nearly 0.1% of GDP
Over the past decade, China has successfully maintained an annual GDP growth of 10.0% on average, achieving a generally-recognized economic growth, and has gradually become an outstanding representative of the new forces in the international community. The long-term optimistic trend of China's economic fundamentals has resulted in the vibrant development of many sectors, including VC. The data from Zero2IPO Research Center shows that from 1999 to 2009, China's VC sector has seen the swift growth with a CAGR of 12.4%, presenting a positive correlation with the GDP growth. The year 2005 represented a turning point for China's VC sector. That year, the entire sector stepped into the stage of explosive development. At the same year, No. 75 document of the State Administration of Foreign Exchange gave foreign VC firms a green light to invest in Chinese enterprises registered overseas and resumed the overseas listing of red chip stocks; the promulgation of the Interim Measures on the Management of Venture Capital improved China's legal system for the VC sector, which attracted more and more overseas VC institutions; and China Securities Regulatory Commission(CSRC) issued the Notice of China Securities Regulatory Commission on Piloting the Share-trading Reform of Listed Companies, indicating the establishment of the multilevel capital market and broadening the exit channels of VC investments.
The contribution of the VC sector to the real economy has aroused more and more attention from all sectors of the society while the sector itself has developed by leaps and bounds. According to the data of the National Bureau of Statistics and Zero2IPO Research Center, we have concluded that China's VC sector has taken up a rising proportion in the GDP, once peaking at 0.096% in 2008. In the international market in 2008, this figure was 0.196% in the United States and 0.108% in Europe, according to the data of the VC associations in the United States and Europe. The experience of the mature markets suggests that even in face of the uncertain international economic climate, China's VC sector will still embrace a considerable space of growth in the next ten years.
China's VC Sector Subject to Reduced Impact of the International Market
To further define the relationship between China's VC sector and GDP, we have compared the annual growth rate of China's VC sector and the GDP annual growth rate to find that the former showed an irregular correlation with the latter before 2005, but started to coincide with the latter after 2005.
The reason behind such change is that most of the VC funds in China came from overseas investors, and the right to make a decision of investment was controlled by foreign partners. As a result, China's VC sector was vulnerable to the impact of the international market. To verify the objectivity of the conclusion, we have carried out a comparable research on the United States and Europe. The result indicates that the GDP annual growth rates in the United States and Europe exhibited a rather identical trend with the annual growth rate of the VC investment in China before 2005, while both demonstrated an irregular correlation after 2005.
In recent years, China's VC sector has become less influenced by the international market, indicating domestic and overseas investors have stepped up their confidence in China's market. This has verified the survey conclusion published by Deloitte and Touche LLP early last year that China has become the most attractive investment market worldwide. With the rapid development of RMB-denominated funds and the good performance of the domestic economy, we expect China's VC sector will be subject to the impact of the international market less and less.
Regional Distribution of China's VC Investments Closely Linked to Regional Economy
According to the data from Zero2IPO Research Center, the top six regions of VC investment in China were Beijing, Shanghai, Guangdong, Jiangsu, Zhejiang and Shandong from 2002 to 2008. While the data of the National Bureau of Statistics revealed that the top four regions in terms of the sum of the GDP from 2000 to 2008 all fell into the top six regions of the VC investment as mentioned above. This proves that the geographical distribution of China's VC investment is closely linked to the regional economy.
However, Beijing and Shanghai have overtaken the other four economic powers to become the regions with the most active VC investment in China. Why? To answer this question, we have particularly compared the industrial structure of both municipalities with that of Henan Province, which ranks 5th by the sum of the GDP. The result shows that both municipalities highlight the development of the tertiary industry, with an obvious scale advantage. In comparison, Henan Province depends more on the primary industry and the secondary industry to drive the economy. In addition, the governments in Beijing and Shanghai have acted earlier than Henan Province to issue policies in support of the VC sector.
The development of the tertiary investment can attract a large quantity of VC investments. Data from Zero2IPO Research Center shows that from 1999 to 2008, the VC investment was mainly channeled into the tertiary industry, including Broad IT, Services, Bio/Healthcare and Clean-tech, which received nearly 80.0% of the total VC investment. According to the future national economic strategy published by the Chinese government at the end of 2009, we forecast that China's VC sector will continuously benefit from the drive of the state policy to upgrade the industrial structure and expand the domestic demand in the short and medium term.
Stock Market: Barometer of China's VC Sector
Just like the real economy, the virtual economy also displays the strong correlation with the VC investment. According to the data from Zero2IPO Research Center, before the outbreak of the current financial crisis, China's VC investment has rendered an obviously similar trend with that of the Shenzhen Stock Exchange Composite Index since 2000. At the same time, we have not found that the VC investment evidently precede or follow the stock market in time. When comparing China's VC investment and the trend of the Nasdaq index, we have reached the similar conclusion.
The VC investment in the United States displays a trend relatively consistent with the NASDAQ index, and both declined in 2007. Different from the United States, however, China's VC investment showed a downward trend only one year after the outbreak of the financial tsunami. This may reveal two facts: On the one hand, China's VC sector does remain at the stage of fast development, presenting a time lag in terms of the impact from the international market; and on the other hand, the strong performance of China economy serves as an important factor that supports the investors' confidence in China's VC sector.
