China state funds fail to muster private capital Setbacks after attempts to follow Singapore with a mix of public and private money
China’s so-called “Singapore model” for managing hundreds of billions of dollars in state-backed funds is coming under fire as auditors complain the cash-laden investors have failed to attract private capital to their regions. Provinces and cities across China have launched a number of multibillion-dollar funds, claiming up to Rmb12.5tn ($1.8tn) in 2018. Often called “guidance funds”, they have been viewed as an alternative to handing out large subsidies to state-owned enterprises as a means of managing public money. In the same way that Temasek, Singapore’s state-backed investment company, has been used to manage the city-state’s public wealth while also encouraging the participation of private capital, China’s guidance funds have sought to bring in a mix of public and private money. Most of the funds have acted as a fund of funds, allocating capital to smaller private funds that invest in everything from semiconductors to industrial technologies.
The objective has been to make investments in key technologies, while also promoting economic rejuvenation in areas of the country hit hardest by a decline in economic growth. But the state investors have been hit by setbacks in deploying capital over the past year. Most recently, reports from provincial accounting authorities have said some of the investment groups have failed to mobilise private capital in their regions, a sign that the model could be falling short in its objective of stimulating economic growth. In Henan, a province in central China, a recent report from local auditors said that 43 government funds that originally sought to raise Rmb38bn had generated only Rmb19.3bn by the end of 2018. A sample of three funds in Henan found that they had mobilised just 1.9 per cent of their private funding target. Two funds that had raised Rmb300m in the province, including one focused on industrial intellectual property, deployed no capital last year. A similar low rate of efficiency has also been reported in recent months in the provinces of Qinghai and Hebei.
“Most of the government investment funds are from the state-owned background, so their management and investment use are not market-oriented,” said Shen Meng, director at Chanson & Co, a boutique investment bank in Beijing. “These funds must follow the rules and procedures of the government system. All investment decisions need to go through a level-by-level approval, reporting and meeting process.” Some national-level funds, such as the China Integrated Circuit Industry Investment Fund that raised more than $20bn in 2014, are among some of the biggest investors in the world. One fund based in the eastern city of Tianjin announced earlier this year that it had raised Rmb220bn. The massive investment funds have continued to raise capital despite a policy setback in 2017 that signalled a lack of support for managing state money modelled on Temasek. They have also become major beneficiaries of China’s new technology-focused Star board.