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Since it was first mentioned at the Political Bureau meeting on April 30 this year, and was reiterated in the "Decision of the CPC Central Committee on Further Comprehensively Deepening Reforms and Promoting China's Modernization" adopted at the Third Plenary Session of the 20th CPC Central Committee, "patient capital", an academic term that is not new in the financial field, has become a new hot word in public discussions again and again recently. As long-term investment capital relative to short-term investment, patient capital has the natural resilience and determination to "run with" innovation, and can become a key support for the "certainty" of the transformation of new and old kinetic energy.

As an important component of new production factors, patient capital also follows the laws of the market economy, with the "visible hand" and the "invisible hand" forming internal support.patienceCapital can provide stable and continuous financial support for long-term, high-risk innovation projects, promote the development of new quality productivity, and thereby promote industrial structure upgrading and high-quality economic development.

Guided by the 2002 Zhongguancun Venture CapitalfundsStarting with the pilot program of establishing venture capital funds by the Ministry of Finance and the National Development and Reform Commission in 2010, my country's government-guided funds have gone through more than 20 years of development. At present, a development pattern has been formed with venture capital guidance funds, industrial investment guidance funds, and infrastructure and public service investment guidance funds as the three main pillars, with a wide coverage, initial scale and clustering effects, and continuously improving market-oriented management levels.

According to statistics from Zero2IPO, as of 2023, my country has established a total of 2,086 government-guided funds, with a target size of approximately RMB 12.19 trillion and a subscribed size of approximately RMB 7.13 trillion. Overall, my country's government-guided funds have played an important role in optimizing capital allocation, improving the efficiency of fund use, and guiding the development of emerging industries, and have formed advanced experiences such as the "Hefei Model", "Suzhou Model", and "Shenzhen Model".

Tian Xuan. Photo/provided by the author

The mission and challenges of government-guided funds in this era

After more than 20 years of development, my country's government-guided funds are being given a new historical mission on the basis of completing basic quantitative changes.

In recent years, with the continuous advancement of my country's economic structural transformation and the long-term stability of the real estate market, the role of land fiscal revenue as a "pillar" in government revenue has weakened marginally, and the importance of government-guided funds in local finance is constantly increasing. Whether government-guided funds and the investment they drive can become a new pillar source of government revenue to replace land revenue by expanding the tax base and capital appreciation has become the focus of attention from all walks of life.

Theoretically, although equity finance cannot replace land finance in the short term, the transformation of government-guided funds from land finance to equity finance is an inevitable requirement for the high-quality development of my country's economy and a trend choice for the sustainable development of the government in the future. Equity finance can make full use of the leading and leveraging effects of government financial funds to expand more diversified and long-term stable sources of income for the government, while also reducing dependence on land fiscal revenue and dispersing risks. In addition, through equity investment, the government can grasp and plan the direction of industrial development, participate in the long-term business development decisions of invested enterprises, and guide high-quality resources such as social capital to invest in technological innovation and new industry cultivation in key links of the industrial chain, thereby improving resource allocation efficiency and promoting the transformation and upgrading of industrial structure and balanced development of regional economy.

On July 26, employees of a company in the smart equipment industry in Huayingshan Economic Development Zone, Huaying City, Guang'an, Sichuan Province, debugged a newly installed robot in the smart workshop. Photo/China News Service

Whether it is to "run alongside" innovation or to complete the transformation of fiscal sources, correctly handling the relationship between the market and the government, upgrading the "patience" of government-guided funds with more mature management experience and more market-oriented operating models, and thus matching the industrial development cycle in a larger time span and realizing capital appreciation, are the core issues that need to be resolved for my country's government-guided funds to "take a step" forward.

Objectively speaking, due to the uniqueness of investment demands and the imperfect design of market-oriented mechanisms, some government-guided funds in my country lack patience in practice, which is the key to restricting the current high-quality development. In particular, as the scale of the funds continues to expand, the shortcomings in the mechanism design of government-guided funds in my country have gradually emerged, becoming the main obstacle to development.

From the perspective of investment demands, LPs (limited partners) with government backgrounds are more concerned about attracting local investment, requiring a certain return ratio to attract high-quality companies to the local area, thereby increasing local employment rate, tax level and GDP growth. This one-way goal orientation has led to the lack of attractiveness of guidance funds to management institutions, especially high-quality GPs, resulting in fundraising difficulties. In 2023, among my country's government-guided funds, state-owned assets accounted for 50% of the subscribed capital, and social capital mainly pursued short-term interests, with unstable investment and low actual subscription rate, and social fundraising is still difficult.

Singapore Temasek Holdings. Photo/IC

From the perspective of the assessment mechanism, most of the current government-guided funds or government financing platforms are not assessed in a packaged manner, but are reviewed one by one on an investment project by one basis, which may lead to the distortion and mismatch of resources. In addition, the current government funds are not sufficiently inclusive of investment projects, and have a low tolerance for failures in the normal exploration and trial and error process of start-ups. Even if 9 out of 10 early-stage projects invested are successful (which is almost impossible in reality), as long as there is a failure, there may be questions about the loss of state-owned assets or even accountability. This mechanism, which highly links investment assessment with political performance, deviates from the original intention of "patience" and, to a certain extent, suppresses the enthusiasm and initiative of "investing in small, early, long-term and hard technology".

A core question about patience

Feature mechanism settings

Whether it is to resolve the current conflict of interests in the investment demands of my country's government-guided funds or to resolve the constraints of the assessment mechanism, the core is a key issue: how to balance the relationship between the government and the market and let the "visible hand" hold the "invisible hand" to form a positive synergy?

Judging from the current practical experience of various countries, Singapore's Temasek model can provide certain inspiration and reference for the development of government-guided funds in my country. Under the Temasek model, an independent investment company established by the government can form an effective coordination between the government and the market that is controllable and fully authorized to market forces through a diversified and balanced board system and a clear definition of the responsibilities of the government and enterprises. The government formulates the strategic investment direction of the investment fund and proposes the project investment return standard. Temasek manages it in accordance with market-oriented operations and commercial principles, has a high degree of autonomy, attracts social capital to enter, and adheres to value orientation, makes long-term project investments, and promotes high-quality economic development while creating maximum benefits for shareholders.

The Temasek model provides a good template for how my country's government-guided funds can balance the relationship between the government and the market, namely, by using the established holding company as a platform to cut off direct administrative intervention, and by establishing a sound board system, operating management mechanism, and risk control mechanism to conduct investment activities, it can sustainably and stably attract social capital and increase long-term returns.

On the basis of clarifying the relationship between the government and the market, to truly give play to the "patient" capital attribute of government-guided funds, it is also necessary to design a more market-oriented mechanism based on Chinese characteristics, develop government-guided funds, and enhance the patience of "national team" capital. Promote the virtuous cycle of "technology-capital-industry" and achieve a win-win situation for investors and corporate development.

First, we need to create a more inclusive and open policy environment. We need to strengthen top-level planning for investment layout, clarify the direction of key investment industries, and establish a negative list; improve the basic principles of government-guided fund investment, conduct differentiated supervision according to different types of investment institutions, and establish institutional standards for joint investment and coordinated development between government funds and industrial capital; implement tax incentives, such as using investment amounts to offset taxable income, and grant certain exemptions or subsidies to the stamp duty, deed tax and other taxes and fees that may be involved in the fund raising and investment process, as well as investment income, management fees, performance remuneration, etc. obtained from the invested enterprises, so as to fully leverage social capital and encourage long-term investment.

Secondly, optimize the market-oriented operation mechanism. Further clarify the positioning of government mother funds, emphasize their guiding role in industrial investment, especially transform the investment management model of government fiscal funds, and strengthen coordination with various types of social capital. National, provincial, municipal, and district-level government-guided funds respectively assume the roles of strategic direction control, provincial industry special layout, and series of sub-funds. They can set up a mother fund overall plate, set up provincial series of industry special funds and city-level sub-funds. Adopt a market-oriented operation model, set up different assessment and management regulations according to fund setting goals, investment categories, etc., and fully leverage social capital. Establish a resource sharing platform, give full play to the government's overall role and the capitalization advantages of the industrial market, strengthen the linkage of funds at all levels, strengthen the allocation of compound talents at different levels of funds, do a good job in project screening and long-term planning of funds, configure diversified investment strategies, and set up differentiated assessment incentive mechanisms, etc., take into account industrial development and long-term investment returns, and promote government funds and various types of industrial capital to jointly invest and coordinate development.

On May 11, workers were processing chips at an optoelectronic technology company in Huai'an, Jiangsu Province. Photo/China News Service

At the same time, the assessment mechanism of government funds should be optimized. The assessment should not be based on the pursuit of short-term returns as the primary goal, but should focus on long-term projects or investment activities, and improve the fault tolerance and exemption mechanism to increase risk tolerance. In particular, in the setting of the assessment mechanism, it is necessary to respect and follow the "power law" of venture capital, learn from the operation mode of market-oriented funds to optimize the assessment system of government-guided funds accordingly, such as changing the annual unit to adopt an assessment mechanism based on the life cycle of the enterprise, and implementing a project packaging assessment system arrangement, so as to better play the guiding and driving role of government funds and guide social capital to increase industrial investment.

In addition, we need to further expand patient capital sources that dare to invest, are willing to invest, and invest for the long term, and give full play to the long-term support role of industrial capital such as corporate venture capital (CVC) for innovation. On the one hand, we encourage all kinds of enterprises to increase their investment in CVC funds; on the other hand, we further smooth the fast track mechanism for CVC funds to apply to equity investment funds, promote the industry and CVC funds to strengthen cooperation and linkage, form the agglomeration effect of upstream and downstream enterprises in the industrial chain, and build new advantages in the industrial chain.

Only through this series of combined efforts can we truly build a system to attract long-term funds and strengthen patient capital, so as to encourage corporate technological innovation and accelerate the development of new quality productivity.

(The author is the dean of Tsinghua University’s National Institute of Finance and vice dean of Tsinghua University’s PBC School of Finance)

Published in the 1153th issue of China Newsweek magazine on August 19, 2024

Magazine title: How can government-guided funds be more “patient” in “running alongside” new quality productivity?

Author: Tian Xuan