However, there may be a breakthrough later this month, when the results of an important project are scheduled to be made public.

'Our research results will help set a high threshold... and will require a highly professional management team,' says Shan Xiangshuang, president of China Science and Merchants Venture Capital Management Co Ltd, which is a leading domestic venture capital firm.

His firm launched the project earlier this year with the Research Centre of the State-owned Asset Supervision and Administration Commission (SASAC).

The former State Development and Planning Commission had worked out draft guidelines for the development of China's venture capital market, but the proposed regulations were vetoed by the State Council in 2001, due to hot debate over the threshold, operation details and exit system of VC in China.

However, efforts never ceased to develop guidelines to facilitate the development of China's VC market, which urgently needs regulations, as most of China's growth enterprises are encountering difficulties in financing their projects.

Shan tells China Business Weekly a highly professional management team of a VC firm will be able to better read the financing demands and investment sprees in the capital market, which he expects may relieve part of the pessimists' worries.

He admits the guality of the current development of VC is not satisfactory, due to some unprofessional operations.

Although the project's results may not necessarily lead to the formal promulgation of industry guidelines in the near future, a breakthrough will nonetheless cheer up industry players, as they have been waiting for a very long time, and they have been constantly disappointed by news of delays in the drafting of regulations.

'There is increasing interest from US venture capitalists to invest in China's growth story,' Tim Halter, president of the Halter Financial Group Inc, tells China Business Weekly.

He made the remarks on the sidelines of the World Economic Summit, held earlier this month, in Beijing.

'But the average US investor is very concerned about policy uncertainties,' Halter says. 'If the legal framework is established, more investors will come.'

Even though they know the risks perfectly well, foreign venture capitalists cannot resist the tempting investment opportunities and high returns in a country that has been grown, economically, above 9 per cent annually in the past several years, and is expected to keep growing faster than any other country, despite a gradual slow down in the next few years.

Howard Chao, partner of O'melveny & Myers LLP, which specializes in investment activities between China and other countries, says he sees the recent trend of VC firms' investments in high-tech firms, conventional industries and recently opened industries, such as the financial, media and retail sectors.

'They are also investing in bad assets,' he says. 'In the recent six months, many international investors have also poured money into properties.'

Besides all these, the venture capitalists are seeing great opportunities in the reform of China's State-owned enterprises.

Total assets of State-owned enterprises directly under SASAC are about 10 trillion yuan (US$1.21 trillion). These SOEs have a combined net asset of 4 trillion yuan (US$483 billion), with a combined net profit of 500 billion yuan (US$60.39 billion).

If they allow foreign investors to hold a combined 20-per-cent stake, with a price-earning ratio at five times, that will make result in capital demand of 500 billion yuan (US$60.39 billion), Shan estimates.

Shan has invested in four SOE projects, and is receiving an average investment return of in excess of 20 per cent.

Now, he is busy preparing to launch a 10-billion-yuan (US$1.21-billion) fund, scheduled to be completed at the end of this year, especially for investment in China's SOE reform.

'Venture capital is too small to invest in the huge SOEs,' Chao says.

Shan plans to increase his fund by launching the second and third phases of the fund, provided everything goes smoothly with the first phase.

Foreign venture capital firms, such as Warburg Pincus Group and the Carlyle Group, are also investing in China's SOEs. These two firms are among the first venture capital firms to establish offices in China.

Foreign venture capital firms, including Carlyle Group, Redpoint Ventures and J.H. Whitney, first came to China between 1997 and 2001 to test the waters. As most of them have invested in the 'US' copy to China' IT (information technology) companies, they choked when the dotcom bubble burst in 2001. Then, they stayed away.

Two years later, these foreign venture capital firms revived and enhanced their investments in China. At the same time, some top venture capital firms, after a long and close watch of the China market, entered. Those firms included National Enterprise Associates and Accel Partners from the United States, 3i from Britain, Apax Partner from Israel, Jafco from Japan and CLSA from France.

Carlyle's strategy in China is two-fold: The high-growth start-ups and SOEs under restructuring. The company sees high investment opportunities with the small and medium-sized SOEs, especially in the next three to five years.

Carlyle has invested in four SOEs in China, and is planning more, say company executives.

Warburg Pincus last year invested 832.5 billion yuan (US$100.5 billion) to hold 22.5 per cent of the Harbin Pharmaceutical Group Holding Co Ltd.

There are abundant opportunities and obstacles especially for domestic venture capital firms to participate in China's SOE reform.

Besides the lack of clear regulations, people's fear of lost national assets is another big issue, due to which, SASAC has prohibited management buyout of large SOEs and only allowed such practice in small and medium-sized SOEs since mid-April.

Venture capital investments in SOEs are most often management buyouts, although it may not necessarily be the management team holding the companies' stakes, says an industry insider.

Statistics from Zero2ipo indicate about 75 per cent of the US$1.27-billion in venture capital investments in China last year were from abroad.

Compared with their foreign counterparts, some domestic venture capital firms are finding themselves short of financing resources, especially if the projects in which they invest take too long.

'Lack of an efficient exit system is causing problems, to some extent,' Zheng Jinqiao, chairman and chief executive officer of Beijing Richlink Capital Research Co Ltd, tells China Business Weekly.

'But we can still find other exit channels, through equity exchanges, for example,' he says.

JIANG YAN China Daily 06/27/2005 page5