Financial liberalisation with Chinese characteristics

In his excellent book on China's industrial policy Barry Noughton describes how Industrial Guidance Funds have become a massive and important lever of government's economic engagement. 

Industrial Guidance Funds (IGF) took off after 2014. They grew rapidly through the end of 2018, and by June 30, 2020, the total designated fund-raising scope of all these funds was an astonishing 11,275 billion RMB —that is, 11.27 trillion RMB, or roughly USD $1.6 trillion.

In that context, The Economist has an article which describes the remarkable world of public private equity (or government guided funds) in China,

More than 1,000 government-guided funds have cropped up across China since 2015. By late 2020 they managed some 9.4trn yuan, according to China Venture, a research firm. A national fund focused on upgrading manufacturing technology held 147bn yuan at the last count. One specialising in microchips exceeded 200bn yuan in 2019. Almost every city of note across China operates its own fund. A municipal fund in Shenzhen says it has more than 400bn yuan in assets under management, making it the largest city-level manager of its kind. In the northern city of Tianjin, the Haihe River Industry Fund is putting to work 100bn yuan along with another 400bn yuan from other investors... Owing to a lack of in-house investment talent, most of them have acted as limited partners (LPs) in private-sector funds... As a result, PE in China is now flush with state financing. In 2015 private-sector money made up at least 70% of limited-partner funds pouring into the industry. By the end of 2019, state-backed funds accounted for at least that much. Their dominance has only increased since then; by some counts they hold more than 90% of the money in Chinese funds of funds (ie, those that invest in other funds).

This about competition,

With smaller funds dying off over the past few years—either owing to lack of capital or huge losses—competition for target assets has eased a little. The market is healthier, investors say, as private and state capital is channelled to better fund managers.

And the inevitable overlap of all this with the Communist Party, 

Shenzhen Capital, a huge state fund, posted pictures on its website of a meeting it held in December where it helped each of the 42 companies it had invested in to launch a Communist Party committee. These are seen as a way to imbue private companies with party ideology.

Even with all its distortions, this is another example of how China has managed its financial liberalisation in its own unique way. Three things stand out. 

1. As Barry Noughton has described, there is a clear industrial policy direction about the specific areas targeted by these funds, the strategic emerging industries (SEI) and Innovation Driven Development Strategy (IDDS). 

2. There is also the disciplining force of competition which operates at multiple levels. Apart from the business competition among the large numbers of funds, there is also the competition among the party leaders of the government entity to demonstrate success. 

3. Finally, the scale at which these things are being done (more than $1 trillion in such guided funds) is critical to the likelihood of success of this approach. For example, it provides enough slack for failures and distortions.