China Outlook
Q. What is the significance of China entering the World Trade
Organization (WTO)?
A. The implications of China’s entry into the WTO are
multifaceted. It will open doors to a more regulated business
environment for foreigners wishing to enter China. It will also
allow more goods and services from China to flow into other
countries. China’s accession to the WTO is a historic event and
without doubt, China is sure to play a major role in the future of
world trade. Entering the WTO will finally help remove many business
practice obstacles that as of today remain a major hindrance for
foreign and domestic businesses alike.
Governmental Focus
Q. What is the Chinese government doing to encourage startup
growth?
A. The Chinese government endorses the growth and adoption of
high technology, as there are 29 government-endorsed incubation
sites in the country representing several thousand startups. There
are already six technology parks in the Beijing district of
Zhongguancun (ZGC), one of which is the Haidian Science Park
where DragonVenture has an office. ZGC has plans to build 15
additional
science parks.
Working closely with industries and relevant organizations, the
government developed different types of tax-exemptions to help new
comers develop physical, technological, and human infrastructures in
an effort to get their startups up and running quickly. The goal of
these tax benefits is to encourage and support applied research,
technological development and technology transfer for both local and
overseas industries.
Q. Are
there any public companies in China today?
A. Ninety percent of publicly traded companies in China are
SOEs (state-owned enterprises). Historically, SOE’s in China were
not designed to be profit-driven. However, the policy makers in
China realize that, in order to compete in a market driven economy,
these SOE’s must be privatized. As such, there are roughly 1100 SOEs
that are now publicly traded.
Economic Outlook
Q. What is the economic outlook for the China stock market?
A. China’s stock market capitalization will surpass that of
Japan’s within 10 years, according to Salomon Smith Barney. At that
point, China will rank as the world’s second largest country in
stock market capitalization.
Q. What is the ratio of China’s stock
market cap to gross domestic product (GDP) versus that of the United
States?
A. In terms of key economic indicators, China in 1999 had a
GDP of US$ 4,515.9 billion, a population of 1250.46 million and a
GDP per capita of US$ 3,611 million. In terms of global rankings,
this placed China 2 out of 191 in terms of GDP, one out of 191
countries in terms of population, and 91 out of 191 countries in
terms of GDP per capita.
The ratio of China’s stock market capitalization to GDP rose from
less than 1 percent in 1990 to 51 percent in 2000. China GDP during
this period rose 173 percent. In comparison, U.S. GDP grew 42
percent over the same period, and U.S. market capitalization to GDP
ratio rose from 49 percent in 1990 to 123 percent in 2000.
Q. How did
the China stock market do last year?
A. The China stock market rose over 50 percent, while most of
the world’s markets were declining.
Q. Are there wealthy individuals in
China?
A. According to very conservative estimates by the Chinese
government, the private sector and individuals in China have now
amassed close to US$1 trillion in liquid assets.
Foreign Investments
Q. Is there any foreign capital going into China?
A. Yes, from 1996 to 2000, China absorbed some $213 billion
in foreign direct investments, which exceeded that of any other
developing country.
Q. Are there any foreign investors in
China today?
A. Yes, there are nearly 180,000 foreign-invested enterprises
in China, which provide 20 million jobs.
Q. Who are some of the U.S.-based
companies that have offices in China?
A. Tenants in the Beijing High-Tech Valley include IBM, GE,
Mitsubishi, and many other multi-national corporations.
Q.
Are there any tax breaks for U.S. companies opening
operations in China?
A. Any foreign invested production enterprise in China’s
research parks shall pay enterprise income tax at a reduced rate of
15 percent on the income derived from production, business and other
resources. The enterprises scheduled to operate for a period of 10
years or more shall be exempt from enterprise income tax in the
first and second profit-making years and allowed a 50 percent
reduction in the third year.
Q. Can I get my
investments out of China?
A. Yes, most VCs, such as Intel Capital, have invested in
China startups via holding companies outside of China. These holding
companies can then go public outside of China. Vivid examples are
ChinaDotCom, Sina, UTStarCom, and AsiaInfo. Additionally, the WTO
will gradually relax doors that control flow of capital in and out
of China.
Q. What are the biggest hurdles to
overcome?
A. Unlike the United States, China has only a limited
investment infrastructure such as few angel investors, limited soft
incubation, little or no management expertise to run successful
enterprises, and a limited number of venture capitalists.
Q. What are some of the mistakes U.S.
companies make in entering China?
A. Many U.S. companies entering China have no developed
guanxi, (strong ties or relationships). As a politically evolving
country, moving from rigid, planned economy rule to a market driven
society, foreign businesspeople expecting to do business in China
still require an association with established contacts and
influencers in order to gain access to investment opportunities.
Lastly, there are obvious language and cultural knowledge barriers
that need to be scaled before conducting business in China.
Industry Outlook
Q. What is the IT outlook?
A. Revenue in the China IT
market will exceed US$30 billion by 2004.
Q. How many Internet users are in China
today?
A. Currently there are just over 20 million Internet users.
Q. What is the projected number of
Internet users?
A. The number of Internet users is growing at a compounded
rate of 54 percent per year. In addition, China will be number two
in the world behind the Untied States by the end of 2001. Yet, as
the U.S. Internet user rate versus population approaches 60 percent,
China’s penetration rate will still be less than 6 percent by the
end of 2001.
Q. What is the number of mobile users
in China?
A. As of September 2000, there were 70 million mobile phone
subscribers in China, representing only 4.5 percent of the total
population. The number of mobile users in China will exceed 200
million within three years, according to IDC, yet market penetration
will still be less than 16 percent. The U.S. market penetration will
exceed 50 percent by 2002.
DragonVenture’s areas of Interest
Q. What areas will DragonVenture focus its
resources on?
A. DragonVenture will focus on
Internet infrastructure, telecom and Linux companies.
Q. Why did DragonVenture select Beijing to
open an office?
A. Zhongguancun, a district of Beijing commonly referred to
as the “Silicon Valley of North China,?alone has 6,000 incubating
companies. DragonVenture was selected as the first on-site soft
incubation company and our office is in the heart of Zhongguancun.
Q. Why DragonVenture?
A. As a group, the DragonVenture team comprises a combined
100+ years of solid investment, business and technology experience,
as well as possesses a keen understanding of Chinese culture. The
team understands
- How to operate mature and large
corporations (Umax Technologies, Inc.; NetIQ Corporation,
NASDAQ:NTIQ; CNET Networks, Inc., NASDAQ: CNET)
- Incubation (VA Linux Systems, Inc.,
NASDAQ:LNUX; Legend Silicon Corporation; Covault Corporation;
Odyssey Technologies, Inc.; EE Solutions, Inc.; Open Source
Asia, Inc.; Penguin Computing, Inc.)
- Bridge Loans (Magellan International
Corp; InphoMatch, Inc.; Odyssey Technologies, Inc.)
- Mergers and acquisitions (Ocron Inc.,
acquired by Umax Data Systems; ASAP acquired by Wonderware
Corporation; Genealogy.com acquired by A&E Television Networks)
- IPOs in both Greater China and the
United States (Cadence Design Systems-U.S. IPO, NewSoft-Taiwan
IPO and AboveNet Communication, Inc.-U.S. IPO, the latter of
which generated 40X return on investment)
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