What is the next big thing in China’s venture capital sector?

The start of a new year often serves as a point for reflection and forecasting. What will happen in China’s capital markets over the next 12 months? What is the next big thing in China’s venture capital sector? Hampton Group has followed 9 leading Chinese venture capitalists. Over the next weeks we will find out from China’s leading experts what in their eyes important developments of 2018 were and what we can expect of 2019.

SHENG Xitai, Founding Partner at Hongtai Capital Holdings

Before even talking about the buzz topics “science and technology”, we have to focus on the fundamental basics: “What is the core purpose of a capital market?”  The capital market has two core functions:

The first one is in plain words: “to make money”, also known as financing.

The second is to increase the wealth of the people participating in the capital market.

Without liquidity, companies cannot “make money”, entrepreneurs cannot increase their wealth, and the core functions of the capital market are gone. This is the core issue. To increase the liquidity of the capital market, the most important strategy is to reduce the threshold for new investors to enter.

According to reports the current investment threshold for Science and Technology is set around RMB 500,000 (£57,000). I think this threshold should be lowered down to RMB 300,000 (£34,000), RMB 200,000 (£23,000) or even RMB 100,000 (£11,500). A reasonable investor threshold is an important condition for ensuring market activity. If you can’t help small and medium-sized enterprises to “make money,” the market eventually won’t be able to sustain itself.

A functioning capital market is reliant on a sound legal system. Therefore, there are two prerequisites for creating a strong capital market in the science and technology sector:

First, increase penalties for fraudulent enterprises, and impose severe penalties on issuers who have obtained significant benefits through fraud;

Secondly, more mature markets have a comprehensive information disclosure procedure.

The primary importance of the registration system is to improve the legal system. Therefore, full information disclosure key component. Disclosing sufficient information, stating the business model clearly, and disclosing suppliers and customers truthfully, are key decision making information in the capital market.

The registration system must be combined with penalties. Currently China’s securities supervision, after financial fraud in listed companies is found, severely penalises intermediary agencies, while the penalties for issuers and actual controllers is very mild. In practice, if a company is fraudulent, it can be difficult to even find their accountant. Channels and methods of investigating such companies are limited. This makes the risk of listing a fraudulent company worthwhile to some individuals.

From a regulatory perspective, it is also unpractical to use a company’s “net profit” as the main listing indicator. Companies have some flexibility in their accounting methods and can easily adjust them to reach their desired “net profit”. Some companies that are in their early development stages require continuous investment as they are not yet profitable, yet they may be the industry leader in their area.

In the past China’s science and technology enterprises were “forced” to look at overseas capital markets. There were no adequate provisions for them in China. I believe Alibaba’s listing in the US in 2014 was a great achievement in China’s development. Since its listing, the company’s market value doubled. However, because Alibaba is listed in New York, China benefited little of the listing. It is a shame that the Chinese capital market has missed a whole generation of internet technology.

This year, after the reform of the listing system by the Hong Kong Stock Exchange, a large number of new companies, including Xiaomi, went public in Hong Kong. Having worked in the venture capital over the past few years, I discovered that this group of unicorns was cultivated in the past ten years. If we miss out on them, we risk waiting another ten years.

Science and technology is a major opportunity for the revitalisation of China’s capital market. It carries the historical mission of leading China’s industrial transformation, and bridging entrepreneurial enterprises, venture capital and capital markets.

What kind of business will matter in the future? First, we need to change our mindsets, especially our regulatory environment. All companies must strive to catch up with the leaders in the stock market.