Beijing launches 200b yuan venture capital fund to foster SOE reform and spur innovation

PUBLISHED : Friday, 19 August, 2016, 2:00am
UPDATED : Friday, 19 August, 2016, 2:00am

China has launched a 200-billion-yuan (HK$234 billion) government-backed venture capital fund as part of Beijing’s move to shake up its bloated state sector and foster innovation in the overall economy.

The fund’s chief promotor and manager is China Reform Holdings Corp, one of three asset management arms that answer directly to the State-owned Assets Supervision and Administration Commission, which manages state-owned enterprises.

The establishment of the fund, approved by the State Council, marked the Chinese government’s latest attempt to use more market-friendly ways, instead of direct administrative orders, to consolidate state assets. The fund could make it easier for the government to dispose of loss-making SOEs and steer funds to more profitable or innovative ones.

Let’s wait and see if such funds can achieve the desired ­results
Long Kaiyuan, Beijing think tank

“Let’s wait and see if such funds can achieve the desired ­results,” said Long Kaiyuan, a researcher at the Chinese Academy of Science and Technology for Development, a Beijing think tank.

Long cautioned that running a very big fund on market principles to turn loss-making businesses into profitable ones required special expertise.

The reform of SOEs is the biggest uncertainty in retooling the world’s No 2 economy. The government under Chinese President Xi Jinping is trying to make them profitable and efficient modern cooperations on the one hand while keeping them firmly loyal to the Communist Party on the other – a balance that is often hard to achieve.

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The commission, which is also the fund’s ultimate controller, is struggling to transform itself from a passive shareholder in China’s largest industrial enterprises but where its also has been an intrusive board chairman known to “manage people, manage businesses and manage money”.

In this context, the commission created China Reform Holdings in late 2010 and moved all assets of two state-owned conglomerates – one a state printing house and the other a car parts dealer – into the new venture. The venture launched the fund on Thursday.

But, despite the “venture capital” reference in its name, the fund was unmistakably created by the government and is here to serve its strategies.

Among the paid-in 100 billion yuan, China Reform Holdings contributed 34 billion yuan, the company said. China Postal Savings Bank, a state lender, contributed 30 billion yuan while state-owned China Construction Bank contributed 20 billion yuan. The remaining 16 billion yuan was paid by Shenzhen Investment Holdings, the Shenzhen government’s asset arm.

The fund would eventually double its size to 200 billion yuan, the commission said, indicating that more investors will join.

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Meng Jianmin, a deputy head of the commission, said the fund would optimise the layout of state capital in the SOEs and “an effective measure to promote hybrid economic ownership” – a rough indication private and foreign funds will be permitted to buy a stake in state-owned business.

Chinese Premier Li Keqiang has repeatedly tried to promote technology and business innovation as new engines of economic growth as the traditional ones based on exports and infrastructure spending weaken. So far the rise of the new economy has not been powerful enough to counterbalance the fall in the old sectors of the economy.

It is not the first time the State Council has set up a government-backed venture capital to fund the new economy. In August, 2014, the central government allocated 2 billion yuan to build up 49 investment funds in joint efforts with local governments. The council also allocated 40 billion yuan to set up a fund to support startups and emerging industries.