Correcting the Drift From Marketization in the Fund Industry (AI Translation)

【周刊提前读】一级市场超八成国资 市场化渐远如何纠偏？

In China, government investment funds make up over 80% of the funding in the primary market, signaling a need for systematic correction. At a meeting on December 16, 2024, the State Council stressed the development of a scientific and efficient management system to promote high-quality development, emphasizing market orientation, legal compliance, and professionalism. The meeting highlighted the importance of establishing management mechanisms that encourage innovation while allowing room for failure, addressing industry's pain points [para. 1][para. 2].

Local governments have overemphasized on quantity and scale rather than market-driven objectives, leading to issues like repetitive investments. Previously, local equity investment funds were used as tools for industrial policies, leading general partners to act as investment offices for local governments. Public fund safety provisions have restricted the decision-making autonomy of the GPs, and the IPO scenario has led to an inability to exit, sparking legal issues in fund withdrawals [para. 5][para. 6].

There is a debate on the role of government investment funds, with calls for a more market-oriented approach akin to Singapore's Temasek. Despite these challenges, many see government-guided funds as uniquely Chinese, hence a complete abolition may not be feasible. Instead, it's suggested to adhere firmly to market principles [para. 10].

In considering reforms, a proposal of establishing a national-level fund of funds has emerged. This would address local dispersion issues and push guiding funds toward a professional, market-oriented operational model. These efforts seek inspiration from international standards and promise better resource allocation across regions by avoiding local investment limitations [para. 17][para. 18].

Current regional competitiveness complicates effective fund management, often prioritizing local demands over strategic investments, similar to how local debts arose from poorly managed infrastructure projects. While some see a long-term challenge in balancing risks in state capital management, proposals call for a clearer separation between the financial contributions and decision-making roles of local authorities in investment funds [para. 20][para. 21].

An increasing reliance on state-owned capital highlights the trend of diminishing private market involvement, further complicating market conditions. Recent suggestions to centralize the authority of fund management from district/county levels to provincial levels have not materialized due to vested interests [para. 13][para. 14].

Furthermore, calls for structured evaluation systems of these funds indicate that current evaluation methodologies are insufficient. There is a recognized need for adopting a more comprehensive set of performance metrics that reflect both financial viability and societal contributions. This ties back to the need for a tolerant approach to innovation and patient capital in China's investment landscape [para. 24][para. 25].

Recent policy observations point towards a potential national-level reorganization, which could transform local funds into strategically managed entities supervised through an overarching governance structure. Such moves are expected to align with broader national development goals and stimulate sustainable economic growth while mitigating prior policy missteps [para. 27].