China’s tech development requires more market-based venture-capital funding

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CEC Capital’s founding partner and chief operating officer Wang Ran has expressed concern about a disturbing trend on the Chinese venture capital sector, despite its size. Wang Ran’s speech claims that over the past few years, “market money” has been replaced by government funds. This dramatic change has made local governments the most powerful players on the market.

In recent years, Chinese local government funding has replaced private venture capital financing. Photo: Shutterstock

Wang said that unlike normal investors who are concerned with financial returns, local government has given priority to attracting investment into their region. The local governments’ policy of risk aversion, which is in direct opposition to the purpose and goal of venture capital, makes it even more complex.

Wang’s speech was controversial because many local governments believed that their role in venture capital markets was both desirable and necessary. They argued that funding from local governments is better suited as “the capital for patience” focusing on growing “new, quality productive forces”, than short-sighted private investors.

As a result, local government-controlled “mother funds” have mushroomed across the country. The government of eastern Jiangsu Province, for example, established a 50 billion-yuan ($6.9 billion), mother fund over the past weekend. This will be used to create various specialised funds that will support local development projects.

Some local governments have already praised their “venture capital performance”. Futian district in Shenzhen , a southern tech hub, for example, reported that its guidance fund, along with various affiliated funds, helped develop 122 unicorns – start-ups valued at over US$1 billion each.
US government policy has made investing in Chinese technology start-ups more difficult for American venture capitalists. Photo: Shutterstock

The exit of US-dollar funds coincided with the growth of these government funds. American investors, who helped build China’s Internet companies and are now losing their relevance in the country, have played a key role in building these successful companies.
The increased tensions between Beijing, Washington and other countries have led to an economic divide. Washington has made investing in Chinese technology startups more difficult for American venture capitalists. However, US funds are now finding it harder to cash out due to a reduced public-listing pipeline.

While there are instances where government venture capital funds duplicate, are inefficient, or waste money, their efforts to foster the “hard tech” boom in the country cannot be ignored. It is not necessarily bad to have competition between local government funds. To develop the most promising start-ups in the country, a certain amount of “overinvestment” may be required.

The risks associated with a shrinking pool of private venture capital in the mainland are not to be ignored. If local governments became the sole source of China’s venture capital, it could mean that the type of investments associated with planned economy would return. China must foster a vibrant venture capital market based on the market in order to achieve its vision for greater innovation-driven economic and technological growth.

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