China Government Guidance Fund
Simplified Chinese政府引导基金
Traditional Chinese政府引導基金

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]

Background

In 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 and emerging technologies.[1][2]

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]

In 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 formally defined guidance funds and encouraged the establishment of guidance funds to support the development of startup companies through venture capital firms.[2]

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]

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]

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

See also

References

  1. 1 2 3 4 5 6 7 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.
  2. 1 2 3 4 5 6 7 8 9 "Four Things to Know About China's $670 Billion Government Guidance Funds". Caixin. Retrieved 29 July 2023.
  3. 1 2 3 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.

Further reading

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