Zhou Xin

Opinion | China’s tech development ambitions need more market-based venture-capital funding

Unlike normal investors focused on financial returns, local governments put a priority on attracting investment inflows into their regions

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Chinese local government-controlled “mother funds” have mushroomed across the country, diminishing the significance of private venture capital. Photo: Shutterstock

Zhou Xin

Published: 7:00am, 25 Jun 2024

In mainland China’s venture capital sector, two widely circulated documents are often discussed. New measures to promote “high-quality” development of the industry was released by the State Council on June 19, while the other document is based on a controversial speech of a Chinese venture-capital veteran who posed a question about the demise of the country’s primary investment market.

Beijing’s 17-article policy document outlines efforts to help venture capital on the mainland become “bigger and stronger, with funds being guided into key sectors through “market-oriented” means. All of these measures highlight the government’s “support” and “encouragement”.

Chinese authorities are taking the venture capital market seriously for good reason. By doubling down on a technology-driven development model, Beijing is trying to avoid the mistakes of the former Soviet Union, which blindly ignored the market in its pursuit of technological advances. China wants to foster the venture capital market for its role in helping finance promising start-ups.

In spite of the Chinese venture capital market’s vast size, one of the country’s most successful investors, CEC Capital founding partner and chief executive Wang Ran, has raised concerns about a disturbing trend in the sector. Over the past several years, so-called market money has retreated and been replaced by government money, according to Wang’s speech. That dramatic change means local governments have become the most powerful players in the market.

Over the past several years, Chinese local-government funding has replaced financing from private venture capital. Photo: Shutterstock

Unlike normal investors concerned about financial returns, local governments have put priority on attracting investment inflows into their regions, Wang said. Making it even more complicated is local governments’ risk-averse policy, which is contrary to the purpose of venture capital.