The Government-Guidance Funds (GGF), also known as Start-up Guidance Funds, are backed by the Chinese government and aim to attract relevant state and local governments, financial and investment institutions, as well as private capital. These are special funds for the non-profit purpose to support the development of entrepreneurial businesses through investing in venture capital institutions or newly-established seed funds by various equity or debt.
According to the 2021 Research Report on Government Guidance Funds released by China Venture, governments at all levels in China have established a total of 1,437 GGF, with a cumulative scale of RMB 2.4666 trillion. In 2021, the number and the scale of GGF established have achieved substantial growth compared with 2020, with an increase of 77% and 207% respectively. From 2012 to 2021, the number of GGF increased by 1,262, with a CAGR (Compound Annual Growth rate) at 26.36%; the amounts of GGF grew by RMB 2.3859 trillion, with a CAGR at 46.21%.
Generally, the GGF have certain requirements on the economic environment. In the past, it was only used in major cities with a certain economic scale and financial market environment, as it involves venture capital institutions and start-up companies. However, this situation is changing in a subtle way.
By 2022, GGF at district and county levels spring up suddenly. According to the incomplete statistic by 21st Century Business Herald, there are 5 out of 13 types that newly established guidance funds by the district and county-level government sponsors. For instance, Feixi country in Hefei City decided to set up a total of RMB 10 billion of Government FOF Investment; Huaining country government under Anqing City collaborated with Shenzhen Capital Group Co, Ltd. to have created a guidance fund; Shougang Fund assisted Beijing's Tongzhou District to initiate the establishment of an industry guidance fund with RMB 5 billion for the sub-center in Beijing; Yi County in Anhui province set up a strategic guidance fund for industry investment with a scale of RMB 300 million, etc.
In the eyes of market players, the participation of the district and county-level governments indicates the guidance funds are "sinking" from key cities to districts and counties. Especially in the district and county-level areas, the funds often have higher demands for "capitals and investment promotion". They hope to use fiscal funds as leverage through GGF. The first is to attract investment from other market-oriented venture capital investors, and the second is through the vehicle by venture capitals to attract invested start-ups to reside in the region.
Nevertheless, there will also be some problems with the establishment of GGF in districts and counties. Due to their economic scales relatively smaller, weak financial market environment, and the insufficient number and scale of enterprises, venture capital funds must consider that the number of investment targets is likely scarce and the small in scale. Except for the counties in the economically developed areas in the east or south, most districts and counties in China may address to a weak market environment and a shortage of dynamic entrepreneurial enterprises. Researchers at ANBOUND who have done the fieldwork indicated that most districts and counties have limited attractiveness to financial capitals and startups.
As the district and county-level guidance funds often have a high demand for "investment promotion", the district and county governments hope to see results in the short term, which will also make some of venture capital companies feel inappropriate. A large Chinese venture capital bluntly stated that they are currently actively investigating industry policies supporting high-tech, the strength of local enterprises, and industrial-chain synergies in various districts and counties. Then, they decide whether or not to absorb those guidance funds.
Personnel in venture capital institutions disclosed to have signed an investment agreement with a district and county-level GGF, stipulating that the investment ratio to the local industry should triple the amount of the guidance fund. Very soon, they were aware of what this task was not easy to accomplish. More often than not, venture capitals would encounter two major problems in the operation of reinvestment. Firstly, there are not many local high-tech companies that can meet the investment requirements; Secondly, the invested companies dissatisfied that the synergy effect of the local industrial chain, so that they had few of interests to make partial production bases and R&D settled down in these areas.
On the top of that, industrial chain coordination is also an issue to be considered in the support given by district or county level authorities in GGF. This is also crucial for judging whether the local economy possesses actual strength.
At present, district and county governments that initiate guidance funds are overall equipped with the larger amount of GDP and development plans for high-tech industry. For instance, the Feixi County mentioned above, whose GDP reached RMB 101.87 billion in 2021, a year-on-year increase of 13.7%, the first one among "hundred billion counties" in Anhui Province. More high-tech companies with high-growth potentials are emerging in this county, which can help to bring others in.
Final analysis conclusion:
By observing the market trends, we can see that Government-Guidance Funds are "sinking" concisely at the district and country levels. On one hand, this is a sign that more and more local governments strengthen their efforts on investment promotion. On the other hand, this also demonstrates the disparities of development level across these districts and countries. The ecology of "financial resources - guiding funds - venture capital institutions – start-up enterprises - industrial chain synergy" has thus been an important sign for measuring the level of local development.
