China has claimed that it has amassed Rmb12.5tn ($1.8tn) of state money across thousands of venture capital funds to achieve its goal of technological dominance by 2025.
But these state-controlled “guidance funds” have failed to spend much of the promised money and overlapping investment strategies may result in overcapacity in some technology sectors, according to a report.
“While the resources controlled by government guidance funds are clearly large, they are certainly much smaller than claimed,” said Lance Noble, author of the report and an analyst at Beijing research firm Gavekal Dragonomics.
His review of cities and provinces with guidance funds found almost 40 per cent had experienced issues in raising or deploying funds.
In 2017, Sichuan province discovered that five of its 18 provincial-level guidance funds set up since 2015 had not yet made any investments. The remaining 13 funds had only invested 6.5 per cent of the funds reportedly raised.
A year later, the city of Suzhou disclosed that 29 per cent of the Rmb2.4bn raised across its 15 local guidance funds had not been invested. Two-thirds of the total funding had come from Suzhou’s finance department.
According to China-based consultancy Zero2IPO, state guidance funds had only raised a total of Rmb3.5tn at the end of 2017.
Guidance funds have become a new channel for subsidy, with their number spiking in 2014 after the central government began policing off-balance sheet financing more closely.
“The major requirement is requiring city A’s VC to invest a certain level into start-ups based in city A,” said a Beijing-based private investor, noting that such investments sometimes included in-kind transfers, such as land.
“Eventually the local government wants start-ups to move into their cities and in the end that means taxation for the city. That’s the whole incentive structure.”
In more far-flung regions, limiting investment to a certain geographical region where there are fewer investment opportunities could lead to waste.
For example, Tangshan, the nexus of China’s steel-producing belt, has a Rmb15bn guidance fund for upgrading old industrial sectors through investments in emerging technology. “Local government guidance funds are generally targeting the same set of priority technology sectors, which is a recipe for industrial overcapacity,” Mr Noble wrote.
Guidance funds are also mixing with private capital. In July, the Financial Times reported that China Reform Holdings, one of the largest such guidance funds that manages $30bn after launching last year, planned to invest at least $2bn with Beijing-based private equity group JD Capital.
Such “shadow” state funding has begun to edge out smaller private investors by driving valuations into “nosebleed territory”, according to a report by Bain & Co last year.
But guidance funds are necessary for supporting the long-term development of capital-intensive hardware sectors, especially in semiconductor chips and related equipment, say analysts.
“In an economy where start-ups and SMEs are struggling for funding, these offer one way of plugging the gap,” said Jonas Short, head of the Beijing office of investment bank Everbright Sun Hung Kai.
“Sure it won't be perfect but it is a practical solution for a developing economy that lacks developed financial markets to efficiently channel capital to homegrown technology and innovation,” he added.
This story has been amended to clarify that JD.com does not manage JD Capital
Follow Emily Feng on Twitter @emilyzfeng
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