China has launched a slew of mega government guidance and venture capital funds to bolster local entrepreneurship and create more globally competitive innovative firms.
Government guidance funds are purpose-built financing vehicles responsible for allocating public investment funds.
Last week, state-owned China Aerospace Science and Technology Corporation (CASC) announced an RMB 150 billion ($22 billion) fund in partnership with other government-owned companies to invest in new technologies.
It was the latest addition to a growing list. Last year, 901 government guidance funds were launched with an aggregate fundraising target of RMB 2.4 trillion ($347 billion). The 2016 figures exceeded both the total number of such funds and their combined fundraising targets between 2013 and 2015.
Some of these vehicles are mega funds with ambitious fundraising goals. At least 44 funds had targets of raising over RMB 10 billion ($1 billion) each at the end of 2016, leading to a total of RMB 1.26 trillion ($180 billion).
Government guidance funds typically get a bulk of their capital from either tax revenue or state-backed loans. These funds, which involve local or central government agencies, have existed in China for over a decade. However, it was only last year that they grew in number and prominence after an endorsement from the Chinese premier Li Keqiang.
China’s government has laid out an ambitious ‘Made in China 2025’ programme that aims to boost the country’s manufacturing and technological innovation. Targets include increasing the domestic content of core materials and components to 40 per cent by 2020 and 70 per cent by 2025.
In line with this programme, government guidance funds are aimed at reducing the cost of capital for Chinese firms and boosting investments in advanced technologies.
Earlier this year, the Chinese government partnered with Sweden to launch a new $1.45-billion guidance fund to help bring Swedish technology and research to China.
The biggest of these guidance funds was launched in September 2016. The RMB 350-billion ($51-billion) China State-owned Enterprises Restructuring Fund aims to boost supply-side reforms at public enterprises. It will also support measures to improve their competitiveness such as through international acquisitions.
Local governments have jumped into the fray, especially after Beijing imposed restrictions on local government debt to deal with its credit bubble and attempts to restrict capital outflows
Last month, China’s Tianjin city established a government guidance fund – the Tianjin Haihe Industry Fund – with a target of raising RMB 100 billion ($14.5 billion). In January, Suzhou City’s government partnered with Shenzhen Capital Group to launch a fund to invest in Big Data and cloud technologies.
In March, Guangzhou Fund, China Reform Holdings and Shanghai Pudong Development Bank jointly established a mega investment fund of RMB 150 billion ($21.7 billion) aimed to support reforms at state-owned enterprises.
The impact of the Chinese government’s push to drive entrepreneurship can be felt in the venture capital world too. According to a recent Preqin report, four of the five largest venture capital funds in the market are focused on China.
In fact, the largest of these is the Chinese government’s China State-Owned Capital Venture Investment Fund, which is set to become the largest venture capital fund ever with a target size of $29 billion. Based in Shenzhen’s Qianhai freetrade zone, the fund will invest in innovative technology and industrial upgrading projects. It will also support technology innovation in state-owned enterprises, especially those owned by the central government.
The stabilisation of its economy and establishment of these mega funds to support the domestic ecosystem has helped China lift some of the curbs it had previously imposed.
According to a recent Reuters report, the Chinese government is likely to soon terminate a two-year suspension on foreign funds raising money in the country to invest overseas.
Launched in 2013, the Qualified Domestic Limited Partnership (QDLP) programme allowed foreign fund managers to raise money within a set quota from high net-worth Chinese investors through a wholly-owned onshore fund management firm and invest the cash overseas. The program was suspended in 2015 after a crash of the Chinese stock market.