As big Chinese companies are trying to scoop up U.S. assets, new Chinese regulations are having the unintended consequence of making it tougher for foreign firms to make venture capital investments in the country.

The regulations, quietly enacted this year by China's State Administration of Foreign Exchange, have been the target of intense lobbying of the government by venture capitalists and lawyers in China in the past two months. The investors want officials to clarify how foreign firms can make legitimate investments in Chinese start-up companies under the new rules, which require new disclosures and approvals for Chinese citizens who wish to move company assets offshore.

Venture capitalists traditionally make small, early-stage investments in start-up companies, hoping to cash out later through an initial public stock offering. In China, though, most venture investments are made through offshore entities in places such as the Cayman Islands because it is difficult for venture capitalists to structure deals and to take companies public on overseas exchanges under China's less-market-oriented corporate laws.

The government, which confirmed it is working with venture capitalists to solve the problem, originally enacted the rules to tackle problems such as offshore money laundering and tax evasion.

But the rules have had the effect of curbing new venture capital transactions in China, at least for now, according to several foreign investors.

"Yes, we're concerned," said Duane Kuang, who oversees Chinese investments for Intel Capital, the venture capital arm of U.S. chip giant Intel Corp. Intel Capital this month announced it had formed a $200 million fund to invest in Chinese technology companies. However, Kuang added: "I'm sure [the issue] will get resolved."

Meanwhile, deal flow in China is stagnating. According to Beijing research firm Zero2IPO Ltd., total venture capital investment in China sank 42 percent in this year's first quarter, to $165 million, from $285 million in the fourth quarter of 2004.

The first of the two new rules dealing with offshore transactions went into effect Jan. 24. A recent Zero2IPO survey of venture capital firms, investment banks, law firms and accounting firms unearthed more concern about the regulations: 79.2 percent of the 48 firms interviewed said the new rules would lead to a decline in Chinese companies listing shares overseas.

Local government offices in China don't yet have any standard or detailed procedures for dealing with the approval requests, said Lawrence Sussman, a partner in the Beijing office of law firm O'Melveny & Myers LLP, which specializes in dealing with investment activities between China and other countries. An official with China's Ministry of Commerce said that agency is working on new policies to help venture capitalists and Chinese entrepreneurs deal with the new rules.

Ellen Zhu in Shanghai contributed to this report.