After years of having to going through an awkward offshore detour to invest in Chinese startups, now venture capitalists are going direct.

They’re transforming companies they previously invested with the traditional system — so-called wholly owned foreign enterprises typically set up in the Cayman Islands — to a joint venture in China. It’s done through a share swap. I first heard about this at a recent Silicon Dragon event in the Valley.

At the event, legendary investor Dick Kramlich of venture firm New Enterprise Associates showed he’s in the vanguard. His firm is transitioning a Hangzhou-based portfolio company, microfinance service UPG, from a wholly-owned foreign entity to a Chinese firm.
This step will let NEA invest in the company directly. Then, when it comes time to exit the company through an initial public offering, NEA and the investment bankers can take UPG public on a local exchange in China.

If these pioneering structures work out, look for lots more to follow. The reason is fairly simple. Since 2006, when new investment laws came into play for China investing, very few, if any, wholly-owned foreign investments have been approved for listings. Debevoise & Plimpton partner Thomas Britt says the “days of round-tripping are gone.”

Indeed, the switch has the lawyers busy. DLA partner Steven Liu notes that his firm is working with a number of companies set up offshore that are looking to come back onshore within China to list on a domestic exchange or in Hong Kong. The draw of favorable price/earnings ratios is one reason why. Jim Boettcher of Focus Ventures points to a first local IPO from his RMB fund—it’s trading at 97 times P/E, nearly nine months after listing.

That’s not to overlook the shortcomings of listing within China: long lock-up times before investors can cash out and a more retail-oriented investor base. The new Shanghai International Board—expected perhaps by the end of this year—is likely to be another development that will shape decision making about where to list among the many options, points out Baker & McKenzie partner Elsa Chan. It could lead to an eventual move away from the gold standards NYSE and NASDAQ.

No matter how the tides turn, it seems clear that venture investing in China is moving further away from its Silicon Valley roots to China’s capitals of finance and innovation.