The government of Shanghai's plans to compensate venture capital firms that fail to make back their initial investment in startups has drawn criticism.

The government of Shanghai has been criticised for its plans to compensate VC firms for investments that lose money, according to Caixin Online.

In a regulation added to the Shanghai Science and Technology Commission’s website in January 2016 and effective as of this month, VC firms are able to apply for compensation if an investment in a technology startup loses money.

Investors will be able to recover between 30% and 60%, with a maximum reimbursement of RMB6m ($912,000) for firms and RMB3m for investment projects.

The regulation will last for two years. It aims to encourage investment in startups and to develop the city as a global technology centre.

However, the regulation has drawn criticism from private equity firms such as Saif Partners and Prosperity Investment.

Andrew Yan, managing partner of Saif Partners, called the idea disastrous and said: “A fundamental principle of the market economy is the match between risk and return. Venture capital investments are extremely risky and limited to only a very few people and institutions. The negative consequences of using public money to compensate investment losses will be unimaginable.”

Xie Zuoqiang, vice-president of Prosperity Investment, said: “The policy may be well-intentioned, but supporting an industry is a long-term initiative.”