Caixin Weekly | Balancing Safety, Returns, and Local Economic Benefits: How Can State-Owned Guidance Funds Achieve Marketization? (AI Translation)

财新周刊｜既要安全、又要收益、还要有利当地经济 国资引导基金如何市场化

In a significant policy shift, China's government investment funds, which provide over 80% of funding in the country's primary market, are slated for systematic reform. During a State Council Executive Meeting on December 16, 2024, strategies were discussed to foster high-quality development within these funds, emphasizing a market-oriented, lawful, and professional operation to better align with national goals. The meeting highlighted the need for patient capital, improved fund management mechanisms, and avoiding private capital displacement. Insiders believe these measures target current challenges within the equity investment industry, urging state-backed investors to embrace supportive roles and inclusive evaluation standards [para. 1][para. 3].

Historically, government guidance funds, introduced around 2000, sought to leverage public capital via market-based strategies to support emerging industries. However, local governments often deviated from these goals, engaging in blind competition, scaling investments beyond initial intentions, and failing financial commitments. This created challenges for private investors, who lamented bureaucratic controls and fiscal responsibilities overshadowing genuine investment risk assessments [para. 4][para. 5].

By 2023, government-guided funds aimed for a target size exceeding 13 trillion yuan, with state-backed assets contributing to over 70% of new private equity funds. While some call for state capital's withdrawal from venture capital due to mismatched risk appetites, others recognize their inherent role in China's market, advocating for a refined approach that maintains market and professional principles [para. 5][para. 6].

Expert opinions lean towards establishing a national-level parent fund to streamline local fund operations, reduce inefficiencies, and foster market-oriented practices. Singapore's Temasek is cited as a model, maintaining fully market-driven operations despite state ownership [para. 6][para. 7]. The push for a centralized approach comes amidst complaints that current government-driven funds behave like regional investment bureaus, complicating market-driven processes [para. 8][para. 9].

Recent data reflects an overwhelming presence of state-owned entities in the fund management sector, stressing direct investments over indirect participation. However, ongoing legal debates, like those around state-owned enterprises acting as general partners, pose regulatory challenges. Article 3 of the Partnership Enterprise Law has been contentious, as practices circumvent it through subsidiary formations, highlighting the need for legal revisions [para. 10][para. 12].

The burgeoning influence of state funds raises concerns about efficiency, with investment returns often required, compelling projects to fulfill local economic goals despite broader financial implications. The mandate for return on investments steers investments into fulfillment roles rather than unrestricted financial growth, potentially stalling innovative ventures [para. 11][para. 13].

In addressing these challenges, a noteworthy recommendation involves setting up a sizeable national fund that can invest without regional limitations, improving resource allocation and mitigating overlapping financial objectives prevalent among local guidance funds. While promising, operationalizing such a fund involves numerous challenges, including aligning diverse investments and overcoming regional protectionist attitudes [para. 13][para. 14].

Evaluation metrics remain a controversial topic. Current assessments favor short-term returns, ignoring broader policy objectives, limiting operational scope. It's suggested that audits integrate third-party insights to account for market complexities and encourage innovative investment strategies [para. 16][para. 18]. This holistic evaluation aligns with the industry shift towards long-term, qualitatively-driven capital management, hopeful for an equilibrium between policy orientation and market viability [para. 15][para. 17].

In summary, the adjustments proposed for China's government investment funds indicate a pivotal move towards a balanced market-orientation while still recognizing state involvement's intrinsic value. This recalibration aims to revitalize the primary market, aligning investment practices with sustainable, long-term national growth objectives [para. 19].