In Depth: Will China’s Push for Banks to Fuel Tech Growth Pay Off?

China has continued its push to stimulate innovation and develop "new quality productive forces"—a key policy concept outlined by President Xi Jinping in 2023—by expanding a pilot program allowing banks to provide equity investments to technology firms. This marks the third such expansion in six months, signaling the government's increased commitment to supporting high-tech and fast-growing companies. The program is designed to channel more funding to venture investors active in smaller technology enterprises, which serve as vital engines of economic modernization [para. 1].

The pilot was initially limited to five of China’s largest state-owned commercial banks, with the legal structure of Financial Asset Investment Companies (FAICs) focused mainly on facilitating debt-to-equity swaps. Over time, however, FAICs’ mandates have broadened to allow direct equity investments in tech firms and, most recently, the inclusion of more commercial banks and insurance funds as potential investors, expanding both the scope and capital pool available for tech investment [para. 3][para. 4].

In March 2024, the National Financial Regulatory Administration (NFRA) announced a further expansion of the pilot, granting FAICs the ability to operate not just in the original 18 cities but also across all provinces containing these cities. This effort seeks to alleviate cash shortages among state-owned investment vehicles—specifically, local government guidance funds (LGGFs)—and address concerns about excessive capital concentration and limited investment opportunities in individual locales [para. 2][para. 4][para. 11].

Challenges persist, however. Industry insiders highlight hurdles such as acquiring talent with relevant expertise to handle high-risk, high-skill investments, the complexities of risk management and regulatory requirements, and the need for larger capital reserves due to the elevated risk profile of equity investments. Strict regulatory oversight and the necessity for annual audits add to the administrative burdens for banks considering ramping up this line of business [para. 5][para. 22].

The history of the FAIC pilot traces back to 2017, when it focused on debt-to-equity swaps for enterprises experiencing financial distress, allowing banks to reduce their risk by isolating problematic assets. The pilot was broadened in 2020 to facilitate direct equity investments in support of regional industrial restructuring—especially in Shanghai and the Yangtze River Delta [para. 6][para. 7]. The major acceleration occurred in the latter half of 2024, with the number of participating regions increasing rapidly [para. 8].

In September 2024, fundamental changes were made to increase the amount of FAIC capital available for direct investments, from 4% to 10% of on-balance-sheet capital, leading to a potential increase in investible funds from 23.5 billion yuan ($3.24 billion) to 58.7 billion yuan ($8.1 billion), and in theoretical leveraged equity investment capacity from 78.3 billion yuan ($10.8 billion) to 195.7 billion yuan ($27 billion) [para. 17][para. 18]. Despite these reforms, concerns remain regarding accountability for losses on high-risk investments, with managers protected from liability only if strict due diligence standards are met. However, the lack of clear definitions around due diligence poses practical challenges in audits and manager evaluations [para. 19][para. 20][para. 21].

Obtaining diversified funding sources remains difficult. The general risk aversion among Chinese investors, who prefer low-risk products with secure returns, means that most FAIC equity investment relies on support from government-related entities. Although insurance companies have now been allowed to invest, their actual participation has been limited due to the high-risk, long-term nature of tech investing and perceived lack of robust incentive mechanisms [para. 34][para. 35][para. 36][para. 38][para. 39].

Finally, FAICs face stiff competition in identifying quality investment targets. Early-stage companies often come with significant risks, while successful firms attract higher valuations and typically have established investors, making it challenging for new entrants to participate [para. 41][para. 42].