The National - News

China’s $800bn ‘guidance fund’ is more money than they can spend

- SHULI REN

If you’re impressed by Masayoshi Son’s $100 billion Vision Fund, China’s $856bn in “guidance funds” will blow your mind.

The country is quickly becoming a major player in the venture capital world. This year, Chinese investors are involved in more than $90bn (Dh330bn) worth of deals, second only to the United States and up from only $11.5bn five years ago.

Some of this comes from China’s technology giants turning themselves into conglomera­tes. Eager to emulate the success of the fund set up by SoftBank, Tencent and Alibaba are avid buyers of young companies. Even unicorns are following suit: ByteDance, which closed a $3bn funding round in October, is now looking to raise $1.45bn for an in-house VC fund.

But the government is also encouragin­g investment­s into start-ups, so that China can push forward its ambitious “Made in China 2025” plan, outlined three years ago.

For years, China relied on cash subsidies to encourage developmen­t of key industries. But since 2014, subsidies have been giving way to so-called “guidance funds”. As of the first half, various levels of the government had establishe­d 1,171 guidance funds, aiming to raise and deploy a staggering 5.9 trillion yuan ($856bn) according to China Venture. Other estimates are even higher: Consultanc­y Zero2IPO puts the figure at more than 11tn yuan. These state-backed investment pools act like VC funds, or funds of funds. For instance, the $21bn China Integrated Circuit Industry Investment Fund, establishe­d in September 2014, owns a 15 per cent stake in China’s largest foundry Semiconduc­tor Manufactur­ing Internatio­nal, and is also a major investor in SMIC’s new 1.8bn yuan VC vehicle.

The idea of guidance funds is not dissimilar to public-private partnershi­ps, which Beijing scaled back a year ago: The government puts up minority equity, and lets the private sector do the heavy lifting to develop key areas such as artificial intelligen­ce, robotics and internet-of-things.

From a strategic viewpoint, China’s technology ambitions certainly need capital. The country is at least three to five years behind the

US in memory chips, according to Nomura Securities. US semiconduc­tor firms spent over $100bn on capital expenditur­e and research in 2018 alone.

But as China hurries to leap forward, cracks are appearing. If Mr Son has trouble allotting his $100bn, imagine the headaches Beijing is having.

The basic problem is that too much capital is chasing after too few start-ups, something even the State Council is starting to realise. In its latest annual fiscal audit, China’s cabinet queried why the 40bn yuan National Emerging Industry Venture Capital Fund and the 20 bn yuan Advanced Manufactur­ing Industry Investment Fund plowed bns into the same company, electric-vehicle maker BYD Company.

Or consider the 72 bn yuan Government and Enterprise Co-operation Investment Fund, establishe­d like those two funds in mid-2016.

By the end of 2017, it could only distribute a tiny portion of its capital and had parked 88.7 per cent in wealth management products, which is supposed to be a no-no as China tries to rein in shadow banking.

Other ways of soaking up the oversupply of guidance fund capital pose different problems. Beijing’s initial idea was that public bodies should not contribute more than 30 per cent of the total capital of venture funds in which they invest. But as local officials jostle to show off to the big bosses in Beijing, best practices are being abandoned. This July, the government of Tianjin said its 30 bn yuan artifcial intelligen­ce guidance fund no longer needs to follow the 30 per cent “hard limit”. If this goes much further, guidance funds will start looking like public-private partnershi­ps, except without the “private” side.

Another way to earmark capital quickly is to build semiconduc­tor industrial parks, as more than 20 cities in China are already doing. But one does wonder why China needs so many chip factories. Sure, Beijing and Shanghai boast some of China’s best universiti­es and smartest talent, but what’s the advantage of Xiamen, a sleepy coastal city in southern China, other than that it’s just across the water from Taiwan? Guizhou, one of China’s poorest provinces, is also doubling down on industrial parks; perhaps storing data and letting robots roam around is cheap there.

One other option is to invest in hot start-ups overseas, but that’s now being closely scrutinise­d. In a November report, the office of the US Trade Representa­tive stated that between 2015 and 2017, 10 per cent to 16 per cent of VC deals in the US had Chinese investors. Going forward, the US government will only broaden its vetting of venture capital funds that have taken Chinese money.

Beijing is reportedly considerin­g plans to delay some of the targets spelled out in its “Made in China 2025” industrial policy. That’s a win-win situation, given the backdrop of trade tensions with Washington.

President Donald Trump can tout the concession as a policy victory; meanwhile, China knows it needs to step back, or risk having bns of money once again wasted on in pet projects that offer no returns.

If Masayoshi Son has trouble allotting his $100bn, imagine the headaches Beijing is having

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