On a train bound for Yichun, Jiangxi, a business developer was resting his eyes.

During the several-hour high-speed rail ride, he occasionally overheard conversations about CATL, BYD, and lithium mines. Driven by curiosity, he struck up a conversation with the other passengers.

He soon discovered that half the train car was filled with five or six fellow industry professionals, all heading to Yichun to scout for investment opportunities.

“To uncover good projects, you have to get your hands dirty,” he said.

Today, an increasing number of unicorns and hard-tech projects are emerging from obscure second- and third-tier cities, or even small county towns.

This is because, over the past few years, venture capital funds have proliferated across the country, extending their reach down to the county level.

While the decentralization of government-guided funds to districts and counties is a positive development, does every region truly have the capacity to “make the most of resources” and “utilize talent to the fullest”?

Change 1: Investment Promotion Methods

According to statistics, in the first half of 2022, newly established district- and county-level government-guided funds accounted for 50% of the national total. Many districts and counties have leveraged these funds to successfully develop thriving local emerging industry clusters.

However, while some districts and counties have the intention to attract investment through capital, they often “have the will but lack the means.” Due to a lack of professional knowledge and practical capabilities, a large number of industrial funds have become “zombie funds” or “problem funds,” which in turn have increased the burden on local finances.

Effective utilization of government-guided funds can effectively drive the development of the local real economy and industrial clusters. Furthermore, they serve to “build a nest to attract phoenixes,” drawing social capital from across the country to support local industrial development.

The most direct benefit of government-guided funds is reflected in the effectiveness of local investment promotion. Compared to traditional “land-based investment promotion,” government-guided funds fundamentally represent a shift in the fiscal operating logic of local governments.

However, districts and counties differ from provinces and municipalities, particularly those in central and western China, where the problem of “good intentions but limited capacity” is particularly pronounced:

First, limited local fiscal capacity constrains their ability to contribute to these funds; second, a lack of open-mindedness results in insufficient market-oriented operations; and finally, relying solely on the resources of a single district or county is insufficient to attract top-tier institutions, high-end talent, and emerging industries.

Funding is the root issue; without resolving the source of funds, no matter how well or professionally subsequent efforts are executed, they will be in vain.

“Increasing revenue and reducing expenditure” have become the two primary approaches for districts and counties to address resource sourcing.

Currently, the sources of local government-led funds boil down to two channels: first, contributions from local fiscal budgets, converting previous grants used to support enterprise development into investments; second, leveraging local state-owned investment platforms, with local state-owned enterprises undertaking the capital contribution tasks.

Many regions possess considerable economic strength. Take Feixi County in Hefei, for example, which achieved a GDP of 101.87 billion yuan in 2021, making it Anhui’s first “100-billion-yuan county.” In April of this year, the Feixi County government invested 10 billion yuan to formally establish a fund of funds—a move that was well-justified.

However, for some districts and counties that are not particularly strong to begin with, attempting to establish funds worth tens or even hundreds of billions of yuan is indeed “asking too much.”

Consequently, private investment and social capital have become a major avenue for “expanding funding sources.”

On the 7th of this month, the National Development and Reform Commission (NDRC) released the “Opinions on Further Improving the Policy Environment and Strengthening Support for the Development of Private Investment.” The document mentions making effective use of government-funded industrial guidance funds to increase support for private investment projects, as well as supporting private investment participation in science and technology innovation projects.

It is evident that the approach of “expanding revenue sources”—guided by the government and supplemented by private investment and social capital—remains the trend for the future. However, there is a fundamental difference between the two: social capital focuses on investment returns, while industrial guidance funds primarily aim to attract and secure investment projects. Therefore, the “traffic lights” for private investment are particularly crucial.

"Cost control" does not mean refraining from investment, but rather spending money where it matters most.

Many districts and counties tend to adopt a conservative approach toward guidance funds, often hesitating to invest. To reverse this trend, on one hand, we should recruit more professional talent; on the other hand, we can seek out outstanding market-oriented capital management institutions.

Professional institutions that have been tested by the market often possess greater advantages and a stronger spirit of risk-taking when making investment decisions than the government, and they are also better equipped to bear or diversify risks.

However, many regions are becoming “savvy” without relying on professional institutions, and “performance-based clauses” have become a key method for attracting investment. These include conditions such as tax revenue targets and IPO timelines; if these conditions are met, the government-guided fund will initiate a share buyout from the enterprise’s actual controller.

Second Shift: Mindset

Fund-based investment promotion is undoubtedly an efficient method, and many regions have adopted it by simply copying the model.

Yet, during policy implementation, there is often a sense of helplessness—as if “the hands are moving ahead while the mind is lagging behind”—resulting in a superficial understanding of the approach.

The dual demand of “wanting both” is a key reason for the failure of district and county-level fund-based investment promotion. While aiming to expand local industries and pursue investment returns, these conflicting goals are often difficult to balance.

Expanding the industry is the most important and ultimate goal; therefore, regarding investment returns, one must be willing to “give up some gains to secure others.” Among these, the reinvestment ratio is a key indicator of investment returns. (Reinvestment ratio = Project reinvestment amount / Government-guided fund contribution)

Many guidance funds in developed regions have already begun exploring reducing the reinvestment ratio to 1:1 or lower. Recently, cities such as Xi’an and Zhengzhou have introduced guidance fund management measures that predominantly adopt a 1:1 reinvestment ratio.

However, the less economically developed the region, the greater the emphasis placed on the reinvestment ratio, with some even treating it as a safeguard clause.

High reinvestment ratios fail to attract social capital, leading to a backlog of fund resources. This, in turn, restricts the use of funds and results in low capital utilization efficiency.

In 2021, a total of 287 districts and counties nationwide established guiding funds, but only 95 of them received reinvestment, with 81% of all reinvestments concentrated in Beijing, Shanghai, and Guangzhou. This indicates that the overall reinvestment performance of district- and county-level guiding funds remains subpar.

However, it is precisely the less developed regions that most need guidance funds and professional investment institutions to support the establishment of industrial chains.

The two seem to have formed a “vicious cycle,” so shifting the mindset regarding capital-driven investment promotion is also crucial.

The crux of policy lies not in the policy itself, but in its implementation.

Appropriate concessions should be made, priorities should be clearly defined, social capital should be allowed to enter, operations should be launched as soon as possible, and the ultimate goal should be achieved more quickly. Today, an increasing number of regions with relatively weaker economic strength have recognized this and are calling for a gradual relaxation of policies.

Three Changes: Industrial Direction

Currently, there are already 2,000 government-guided funds in China, with investment portfolios largely concentrated in strategic emerging industries such as new energy, new materials, and biopharmaceuticals. Overlapping industrial investments are a common occurrence.

If, at this stage, districts and counties continue to treat these sectors as their primary industries, it would be somewhat akin to “butting heads against a stone.”

While it is true that government-guided funds should primarily target strategic emerging industries, the investment focus at the district and county levels must be more refined, precise, and concentrated.

Liyang City, a county-level city in Jiangsu Province, has established a 10-billion-yuan government investment fund, with strategic emerging industries such as “energy storage and intelligent connected vehicles” as its leading sectors.

While these sectors are new, they are also well-defined.

"Investing early and in small-scale projects" is another aspect that distinguishes district- and county-level guidance funds from their national and provincial counterparts.

According to statistics, “venture capital funds” account for 28% of all district- and county-level guidance funds nationwide—a proportion comparable to that at the municipal level, yet higher than at the national and provincial levels.

When it comes to attracting investment, districts and counties cannot compete with first- and second-tier cities for large-scale projects. Why not shift our mindset and “start small”?

In March, Xiamen issued the Administrative Measures for the Science, Technology, Innovation, and Entrepreneurship Guidance Fund, proposing a focus on seed-stage and early-stage enterprises; in the same quarter, Chengdu High-Tech Zone, Qingdao High-Tech Zone, and others established angel master funds.

In Conclusion

Today, the decentralization of government-guided funds to districts and counties has become an inevitable trend. Regions that have already established such funds should seize the opportunity to stage a successful turnaround; those that have not should prepare thoroughly so they can take the lead when the opportunity arises.

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