This article is based on a story in BioWorld Asia™ entitled "Outbound Chinese investment on the rise: RMB ‘going-out’ party," written by Shannon Ellis, Staff Writer at BioWorld Asia. ChinaBio® Today thanks BioWorld for permission to base the following article on their original, which was published November 26, 2014. BioWorld Asia is a publication of Thomson Reuters.

Because China has recently loosened its rules on converting the Chinese yuan into foreign currencies, China RMB-denominated venture capital funds have a new lease on life: they can compete with western VC funds for US and European life science deals. It couldn't come at a better time, says BioWorld (see story), because China is awash in investible cash, and the competition to enter China deals is fierce. By contrast, western companies seeking venture capital sometimes must lower their terms to entice investors. To western pharma execs, a China VC  ̶  who doesn't argue with the term sheet and takes a mostly hands-off approach to oversight  ̶  is a very welcome sight. 

“This is a big change for RMB money to be invested in big, high-tech deals abroad and this will naturally bring more talent, more technology, awareness and access back to China,” Qingsheng Zhu, managing partner of Frontline BioVentures, told BioWorld. Shanghai-based Frontline runs both US dollar and RMB funds, but most of its capital is in RMB.

Previously, conversion was so slow  ̶  and iffy  ̶  so Frontline would be closed out of attractive deals, even if the VC firm had a relationship with the biotech. “If it is a USD-based deal, they would not talk to us – even with friends – they would not ask us to participate because it might delay the deal closing. But now, all of a sudden, I can say, ‘I can do the deal with you guys,’” Zhu said.

The new currency rules were put in place this summer. Under the old system, a request to convert RMB to dollars meant a two-month consideration process. And the answer could easily be "No." But when Frontline put in a request to exchange RMB to make an investment in MID Labs, the answer was a "Yes" that came in a couple of days. The money was wired a few days after that in a process that seemed like simplicity itself.

However, the growing appetite of China VCs for western deals is facilitated by more than easy currency conversion. As we reported last week, Haiyin Capital, a China VC, made a $5 million investment in the C funding round of Seattle-based Cerevast Therapeutics (see story). Cerevast is currently conducting a Phase III trial of its acoustic medical device for treatment of ischemic stroke. According to Forbes (see story), when Cerevast's CEO was on the road raising money, US venture capitalists tried to beat down the valuation.

Haiyin's attitude was different: it viewed the deal as a strategic transaction with China market potential as a significant value-add. For Cerevast's CEO, the China VC's attitude was an uplifting change from the US VCs he was dealing with. 

Similarly, Ally Bridge, a Hong Kong-US venture capital firm, participated in the $8.3 million funding of Piers AG, a Munich preclinical-stage biotech developing novel cancer drugs (see story). Although this was the first investment Ally Bridge made in Germany, it has always maintained a cross-border focus, with other investments in the US and Europe, along with China companies.  

And in a non-VC deal, also announced during the last month, Sino Biopharmaceutical (HK: 1177) said it would invest as much as $128.5 million in Karolinska Development (SS: KDEV), a Stockholm firm that supports translational drug development in Scandinavia (see story). Sinopharm will participate along with Karolinska in innovative academic-based concepts. But the larger point may be that it will have a first look at China rights for Karolinska-developed projects. Like the VCs mentioned earlier, Sino Biopharma is investing outside of China to find novel drugs and medical devices.  

In the past, China wanted to keep the price of its currency stable. Although selling the currency would have a desired effect  ̶  depressing the price of the yuan  ̶  the government was running a "China for China" policy, wishing to keep foreign interference to a minimum. That caused China's current economic situation: low prices helped China become the world's manufacturer, the country invested in infrastructure and the wealthy bought more and more apartments.

Now China wants to transition into an innovative, consumer economy with a larger emphasis on service businesses. Investments from China VCs to ex-China companies  ̶ and the reverse  ̶  are being allowed to replace the old, highly regulated system to help make the switch. With any luck, both sides will be better off because of the cross-fertilization.

Disclosure: none.