China's venture capital market is huge, but one of the country's most successful investors, Wang Ran, founding partner and CEO of CEC Capital, has expressed concern about a disturbing trend in the sector. In his speech, Wang said that in the past few years, so-called market funds have been withdrawn and replaced by government funds. This dramatic change means that local governments have become the most powerful players in the market.
“Unlike regular investors who care about financial returns, local governments prioritize attracting investment inflows to their regions. Local governments' risk-averse policies, which go against the objectives of venture capital, further complicate things,” Wang said.
Wang's speech was controversial as many local governments believe their role in the venture capital market is necessary and desirable. They argue that compared with short-sighted, profit-hungry private investors, local government funding is better suited as “patient capital” focused on nurturing “new high-quality productive forces.”
As a result, local government-controlled “mother funds” have mushroomed across the country. For example, the government of eastern Jiangsu province set up a 50 billion yuan (US$6.9 billion) mother fund over the weekend to be used for various specialized funds for local development projects.
While there are instances of duplication, inefficiency, and waste among government venture capital funds, efforts to nurture the country's “hard tech” boom cannot be ignored. Competition between local government funds is not necessarily a bad thing. But a certain amount of “overinvestment” may be necessary to nurture the most promising domestic startups.
Still, the risks associated with a decline in private venture capital in mainland China cannot be ignored. If local governments become the sole source of venture capital in China, it could mean a return to investment forms associated with planned economies. Ultimately, China needs to foster a vibrant, market-based venture capital market to realize its vision of expanding innovation-driven technology and economic growth.
