A China Government Guidance Fund (Guidance Fund) is an investment vehicle set up as a public–private partnership that aims to further China's industrial policy goals. It may either invest directly in companies or tangible projects, or invest indirectly by investing in other investment funds (known as sub-funds) through a fund of funds approach.[1][2][3] The typical government guidance fund operates as a fund of funds.
| China Government Guidance Fund | |||||||
|---|---|---|---|---|---|---|---|
| Simplified Chinese | 政府引导基金 | ||||||
| Traditional Chinese | 政府引導基金 | ||||||
| |||||||
Background
editIn the mid-1990s, the government of China began promoting industrial investment funds which were the predecessor of guidance funds.[2]
The Government of China set up guidance funds to provide support entrepreneurship and technological innovation of but not limited to Startup Companies as well as small and medium-sized enterprises. These funds raise money from both public and private sources and make investments consistent with government priorities such as artificial intelligence, emerging technologies,[1][2] biomedicine, aerospace, or semiconductors.[4]: 167 Most operate as funds of funds.[4]: 164 The vast majority funds are ultimately invested in strategic industries.[4]: 166
Government agencies at central, provincial, and local levels all establish guidance funds. This typically involves creating the fund, setting a fundraising target, financing 20%-30% of the target from the budget provided and raising the rest from other investors whose contributions are called "social capital" . While these social capital investors are equated with private capital, they are often state-owned enterprises and public banks. To entice social capital investors, the government sponsor may assume investor losses, forgo interest payments or provide other incentives.[1][2]
Guidance funds use a limited partnership structure where a general partner makes investment decisions and handles day-to-day operations while the limited partners contribute capital and take returns or losses. The general partner may be either a government-related or a third party investment manager. The Ministry of Finance has encouraged government officials to grant more autonomy to third party managers. The limited partners include the social capital investors.[1][2][3]
Each guidance fund has its own investment objectives and restrictions. Some shall invest only in certain sectors or regions.[1] The primary goal of government guidance funds is to attract industrial investment and resources rather than to maximize financial returns.[4]: 168 Although it is permissible for government guidance funds to have losses, losses are politically risky for fund managers (who are often government employees).[4]: 168
There are three phrases to the development of guidance funds. In the first phrase, from the early to mid 2010s, the government set up a number of initial funds as well as the supporting legal framework. In the second phrase, there was a boom in guidance funds set up between 2015 and 2018, fueled by factors such as government policies, loose regulation, restrictions on other spending and trend-chasing among government officials. In January 2015, Premier Li Keqiang chaired a meeting to set up national-level government guidance funds. In the third phrase, starting around 2018, the pace of forming and fundraising for guidance funds slowed down due mostly to tighter regulations.[1][2][3]
History
editIn 2002, one of the first guidance funds was launched in Beijing to support startup companies in Zhongguancun.[2]
In 2005, the National Development and Reform Commission (NDRC) formally defined guidance funds and encouraged the establishment of guidance funds to support the development of startup companies through venture capital firms.[2]
In 2008, the State Council set out a policy framework for establishing government guidance funds, describing the purpose of these funds as to "leverage up and amplify the impact of fiscal funds, increase the supply of startup capital, and rectify market failures in the allocation of startup capital".[4]: 161 The policy framework also stated that a government guidance fund can operate as fund of funds and that private capital can also be used with government funds to increase the investment in start-ups.[4]: 161–162 The State Council described the basic principles of government guidance funds as "guided by government, operated by market rules, scientific decision making, and risk prevention".[4]: 162
During the tenure of Xi Jinping, the use of government guidance funds has increased.[5]: 122
Guidance funds did not draw much attention until 2014 when the China Integrated Circuit Industry Investment Fund was formed and Made in China 2025 was launched.[2] Government guidance funds have been a significant form of policy support for the goals of Made in China 2025.[5]: 122 Local governments' responses to 2014 changes in the Budget Law drove growth of government guidance funds, as local governments increasingly used government guidance funds to develop business after the 2014 changes limited the amount of budget subsidies they could provide to firms.[4]: 163
Beginning in 2015, the Ministry of Finance and the NDRC issued detailed rules for the management of government guidance funds by local governments.[4]: 163
As of the 2020 Q1, there were 1,741 guidance funds set up with a cumulative target size of 11 trillion RMB. However the funds had raised only 4.76 trillion RMB which was less than half of the target set.[1]
Examples of Guidance Funds
editSee also
editReferences
edit- ^ a b c d e f g Luong, Ngor; Arnold, Zachary; Murphy, Ben (March 2021). Chinese Government Guidance Funds: A Guide for the Perplexed (Report). Center for Security and Emerging Technology. doi:10.51593/20210011.
- ^ a b c d e f g h i "Four Things to Know About China's $670 Billion Government Guidance Funds". Caixin. Archived from the original on 29 July 2023. Retrieved 29 July 2023.
- ^ a b c Yin, Jianfeng; Wu, Jianwei; Wang, Zengwu (4 September 2021). Whither has the Money Gone: Fund Flow and Mechanism Under a Grand Asset Management Framework. Springer Nature. ISBN 978-981-16-4931-8. Archived from the original on 29 July 2023. Retrieved 29 July 2023.
- ^ a b c d e f g h i j Lan, Xiaohuan (2024). How China Works: An Introduction to China's State-led Economic Development. Translated by Topp, Gary. Palgrave Macmillan. doi:10.1007/978-981-97-0080-6. ISBN 978-981-97-0079-0.
- ^ a b Tsang, Steve; Cheung, Olivia (2024). The Political Thought of Xi Jinping. Oxford University Press. ISBN 9780197689363.
Further reading
edit- "Understanding Chinese Government Guidance Funds". Center for Security and Emerging Technology. Retrieved 29 July 2023.
- Feng, Jing (1 September 2018). "China's Government Investment Funds: Evolution, Risks and Reform Measures". China Finance and Economic Review. 7 (3): 115–128. doi:10.1515/cfer-2018-070307 (inactive 1 November 2024). ISSN 2196-5633.
{{cite journal}}: CS1 maint: DOI inactive as of November 2024 (link) - Pan, Fenghua; Zhang, Fangzhu; Wu, Fulong (28 August 2020). "State-led Financialization in China: The Case of the Government-guided Investment Fund". The China Quarterly. 247: 749–772. doi:10.1017/S0305741020000880. ISSN 0305-7410. S2CID 225241514.
- Lin, Lin (July 2015). "Re-Engineering a Venture Capital Market: The Case of China". law.nus.edu.sg. Retrieved 29 July 2023.
- "China Government Fund Ranking". China Money Network. Retrieved 29 July 2023.