The Chinese government has set up a special fund of 100 million yuan (about 12.8 million U.S. dollars) to encourage venture capital companies to invest in technology-based small and medium-sized enterprises (SMEs).By "venture capital companies", they mean VC funds. What is different about this initiative is that instead of government entities giving direct grants to companies, the government has figured out that this approach is largely a waste of money and is encouraging investment into VCs, with the idea that they will allocate capital more effectively. In the past, government money has been given out by various research institutes either to companies that were well-connected politically, or to companies founded by researchers who worked at the government institutes themselves. As usual, the Chinese government eventually catches on and experiments with an another approach. If shows promise, the funding will rapidly increase (they don't lack for money as you may have noticed).
Unlike past investment which has been directly injected into technology-based SMEs, the fund, jointly offered by the Ministries of Finance and Technology, will, for the first time, target venture capital companies, venture capital management enterprises and service agencies capable of investing in a burgeoning number of technology-based SMEs.It is worth noting that "technology-based" is to be interpreted broadly and does not necessarily mean "IT" as westerners may think of it:
Technology-based SMEs refer to those whose business development mainly hinges upon new technical innovations which are relatively uncertain in terms of application and market prospects. As a result, banks and venture capitals tend to be cautious when it comes to invest in them.One final point is that the success or failure of this approach may come down to which type of VCs are funded. There are a large number of government sponsored VCs who are pretty much hopeless. If this money goes to the Inner Mongolia Venture Capital Fund then all bets are off. If it goes to IDG or Kleiner Perkins China then Beijing may be on to something.