First, let’s look at a set of figures.

Data from ChinaVenture shows that as of the end of 2025, district- and county-level funds accounted for 44% of the total number of government funds nationwide. However, due to financial constraints, the capital size of these funds represents only 11.3% of the total.

Accounting for nearly half the total number but only 10% of the total capital—this is the true picture of government funds at the county level.

Some time ago, a document from the General Office of the State Council quietly caused a stir in investment circles. The “Guiding Opinions on Strengthening Supervision, Preventing Risks, and Promoting the High-Quality Development of Private Equity Funds,” commonly known as the General Office’s “Document No. 54.”

One sentence in the document, though brief, reads: “Strictly control the establishment of new government investment funds; in principle, counties and districts shall not establish new ones, and where it is indeed necessary to do so, approval must be sought from the higher-level people’s government.”

This single sentence slammed on the brakes for the county-level funds that had been the hottest trend in recent years.

With funds already scarce, why were they so eager to set them up?

Behind this lies the mindset that has driven county-level governments to squeeze their way into this high-stakes financial game.

01 The Craze Spread All the Way to County Towns

The story begins in Hefei.

State-owned capital bet on BOE, took a stake in NIO, and invested in Changxin Memory—a few key moves that transformed a provincial capital, once derided as the nation’s “largest county town,” into the most formidable venture capital hub.

Not only did the fiscal books look better, but industries actually took root. This success story was so compelling that it began circulating repeatedly among local government circles around 2020. When land sales stalled, the solution was to invest in equity—a move that came to be hailed as the model for the “equity-driven fiscal era.”

Consequently, from the provincial to the municipal level, from the municipal to the county level, and from the county to the industrial park level, everyone rushed to set up funds.According to data from the Asset Management Association of China, by the end of 2024, the cumulative scale of government-guided funds had reached 3.3 trillion yuan. Starting in 2022, this craze began to trickle down to districts and counties—which was precisely the pivotal moment when the entire endeavor began to go off the rails.

Why push ahead despite limited funds? To understand this, we must look at the predicament of investment promotion officials.

In recent years, reliance on land-related revenue has become unsustainable, regional competition has intensified, and with the implementation of the “Regulations on Fair Competition Review,” the old practice of “case-by-case” negotiations—such as offering tax rebates or land incentives—has largely disappeared.

Yet investment promotion targets have not been relaxed in the slightest, and the pressure to meet these targets continues to be passed down the chain. Funds have thus become the new approach that appears both the most convenient and the most compliant—using the guise of equity investment to attract enterprises.

The combination of funds and projects has thus become standard practice in many regions. Companies often require local governments to provide a certain proportion of equity investment as a condition for setting up operations; without it, they won’t come. The practice of pairing a single fund with a single project is more about meeting companies’ demands for incentives and subsidies than about professional asset allocation.

Just how intense has this become? In Anhui—where the “Hefei Model” has gained widespread fame—there is a county with fiscal revenue of less than 4 billion yuan, yet a state-owned enterprise platform under its jurisdiction has established 15 private equity funds. A single county’s financial resources are propping up a portfolio of more than a dozen funds.

Even more subtle is a form of pressure that no one dares to voice openly. In many places, failing to establish funds is seen as a lack of initiative—it has become an unspoken rule.

If other counties have set them up and you haven’t, doesn’t that suggest a lack of enthusiasm for attracting investment or insufficient resolve to transform the local economy?

Amid this internal competition, some counties that lack the necessary conditions have no choice but to bite the bullet and set up the framework for a fund first—even if there are hardly any local projects worth investing in, and even if few people in the entire government truly understand how funds operate.

02 Funds Have Become a Backdoor for Financing

“A good idea gone awry.” A deputy county magistrate in charge of finance in a northern county used these four words to describe the county-level funds he had encountered.

He laid bare the entire process of this distortion: fundraising relies on quotas, investments on directives, management on administrative intervention, and exits on government bailouts. Even if a fund is fully compliant in form, it cannot foster genuine industry; what’s often left behind is a mess.

The root cause lies in a mismatch in mindset. Many grassroots officials are accustomed to the old ways of infrastructure development—prioritizing input over output and construction over operations.When building roads and cities, pouring money in yields visible projects. But equity investment requires judgment, patience, and a tolerance for failure. Applying an urban development mindset to manage market-oriented industrial funds almost inevitably leads to the entire process going off the rails.

Trace the money’s path, and you’ll understand how this backchannel was established.

Most of the funds for county-level industrial funds come from local government budgets or urban investment platforms—essentially public funds. To attract private capital, local governments often promise to cede returns or even sign rigid buyback clauses. On the surface, it’s an equity investment; in reality, it’s a loan.

This practice—where equity is merely a façade for debt—has quietly gained popularity in state-owned capital-backed funds over the past two years. Once an investment fails and the money cannot be recovered, the original equity contribution gradually accumulates as local government hidden debt.

Reinvestment requirements represent another major hurdle for fund managers. Local governments, having provided the capital, require that funds invest in local projects at a specified multiple of their investment.

This ratio was once pushed very high; the industry-average reinvestment multiple briefly reached 2.6 times in 2017 before steadily declining, falling to 1.31 times by 2024. Even with this reduction, the challenges remain.

A general partner (GP) in the biopharmaceutical sector once described a very practical dilemma: if a local government contributes 20 million yuan and requires a 1.5x reinvestment ratio, the fund must invest 30 million yuan in local companies. However, with the local biopharmaceutical industry chain virtually nonexistent, where is the money supposed to go?

Even more distorted is the logic behind mandatory investments. In some localities, as long as a project is designated as a key investment target, the fund is required to invest in it—regardless of its investment value or the level of risk involved.

This has strayed from the essence of investment and more closely resembles a government subsidy disguised as a fund structure.

The process of competing for projects is equally chaotic.

To secure projects, districts and counties drive up valuations against one another. One general partner (GP) described this atmosphere:

Even after a price has been agreed upon, the other party can still raise it at the last minute. Amid this bidding war, the valuations of a batch of projects have been driven to absurd levels. However, securing projects through equity investment does not generate GDP out of thin air; it merely shifts it between different regions, and there may even be losses during the relocation process.

When it comes time to exit, the financial picture looks even bleaker.

According to public reports, an industrial fund in a certain county or district—with fiscal contributions exceeding 10 million yuan—invested in four projects. Ultimately, hampered by narrowing IPO channels, only one project managed a narrow exit through a buyback by the major shareholder; the recovered funds were insufficient to cover the principal of the other three failed projects.

Investing in four projects and losing money on three is actually the norm in early-stage equity investment, but when scrutinized under the magnifying glass of an audit, it immediately sparks controversy over the loss of state-owned assets.

Ultimately, the shortcoming lies with the people involved. A representative from a county finance bureau put it bluntly: “To a large extent, we’re just listening to the fund managers spin their stories.” Across the entire bureau, only two or three people truly understand the logic behind fund operations; most can only grasp the industry outlook described by the managers but are unable to effectively question or provide checks and balances on their professional judgments.

03 Risks Emerge on the Asset Side

When a county-level fund runs into trouble, the problems never stop at the fund itself.

Fund losses first hit the state-owned asset platforms acting as investors; as these platforms’ assets shrink and they are forced to honor guarantees, the impact trickles down to local finances. When local finances cannot make the necessary adjustments, the hole in hidden debt widens, and in severe cases, it can drag down the credit rating of the entire region.County and district finances are small in scale and have weak risk-bearing capacity, making them precisely the most vulnerable link in this chain.

Why are counties and districts the first to be targeted?

Zhang Jie, a professor at the Institute of Chinese Economic Reform and Development at Renmin University of China, offered an assessment in a 2024 paper on local government debt risks: whether considering explicit or implicit debt, China’s county- and district-level governments have become the key areas where debt risks are most concentrated and most difficult to resolve.The localities with the weakest financial foundations are the least able to withstand high-risk trial-and-error.

Recently, a star tech company—which started in the home appliance sector and now spans multiple consumer and hard-tech fields—has brought the nature of this risk into the open.

A significant portion of the funds for this company’s expansion came from local government industrial funds. According to a review of public reports, the venture capital platform affiliated with the company manages dozens of funds with a combined scale of hundreds of billions of yuan, nearly all of which have local state-owned capital backing.

The strategy involves packaging individual business units as independent projects, registering them in partner cities, and then channeling funding for these projects from jointly established funds.

What is particularly puzzling is the valuation: these business units, which have neither products nor revenue, are often given a starting valuation of hundreds of millions of yuan, whereas in the eyes of market-oriented institutions, they might be worth only a few million yuan at the angel round. Not long ago, many localities in the Yangtze River Delta began investigating the exposure of enterprises within their jurisdictions to such companies.

Almost simultaneously, a similar logic was also halted on the financing side.

In early June 2026, regulators suspended the acceptance of applications for the entire chain of urban investment data asset ABS transactions. While this model sounds innovative, its core is familiar: urban investment companies pledge dormant data—which lacks market liquidity—as collateral for loans, and securities firms then package it into securities. Repayment relies on the creditworthiness of the urban investment companies, not the data itself.In the first four months of 2026 alone, the total value of applications received by stock exchanges exceeded 180 billion yuan, surpassing the total for the entire year of 2025.

One approach uses funds to leverage investments, while the other uses data as a packaging tool on the financing side—both point to the same root cause: local governments are using their credit to leverage industry and financing, blurring the line between government and market risks.

This is precisely what regulators are truly wary of. In the past, the greatest risk for local governments stemmed from the liability side—how much they borrowed and whether they could repay it.

Now, as more and more local state-owned enterprises are deeply involved in industrial development, with funds and equity becoming new tools for attracting investment, risks are beginning to emerge on the asset side.

If invested capital becomes trapped or companies in which they’ve taken equity stakes run into trouble, it will inevitably burn through the fiscal budget. With risks looming on both the liability and asset sides, regulators must re-establish a clear separation between industrial risks—where bold trial and error is permissible—and fiscal risks, which cannot be allowed to expand indefinitely.

In fact, the market had already signaled this shift long before policy measures were introduced.

Data from the Asset Management Association of China shows that the number of newly registered district- and county-level private fund managers nationwide has dropped to zero in 2024. The market has already voted with its feet on the viability of county-level funds; the State Council General Office’s “Document No. 54” merely codifies this assessment into policy.

04 What Is This Brake Aimed at Preventing?

When viewed in context, the State Council General Office’s “Document No. 54” is not simply a matter of casually applying the brakes.

In its general requirements, the document contains a sentence that, unusually, explicitly points out the extreme distortions.

Some private equity funds have become tools for illegal and criminal activities, as well as new and hidden forms of corruption. Some localities have established industrial and infrastructure funds as a disguised means to finance urban investment companies and take over troubled enterprises; while ostensibly operated on a market-based basis, these funds have essentially become fronts for hidden debt.

Regulatory tightening has been a consistent, gradual process—not a sudden adjustment.As early as the State Council General Office’s “Document No. 1” of 2025, it was stated that government investment funds should not be established for the purpose of attracting investment; reducing or even eliminating reinvestment ratios was encouraged; and county-level governments should strictly control the establishment of new funds. With the recent Document No. 54, the criteria have been tightened further: in principle, counties and districts are not allowed to establish new funds.

What exactly are they trying to prevent? According to several local finance officials, the core objective is to implement a unified national market.

On the one hand, it strictly prohibits cities and counties from providing disguised fiscal subsidies under the guise of funds; on the other hand, it strictly prevents the disorderly expansion of local hidden debt.

Ultimately, the goal is to redraw the boundary between government and the market—a line that has been blurred by funds and data assets.

From the perspective of county-level governments, the implications of this document in terms of deregulation are actually no less significant than those of its restrictions.

First, consider the safety of funds. County and district finances are already strained; expenditures to cover salaries, operational costs, and basic public services are often tight. If limited funds are invested in high-risk projects—and if local governments are required to provide a safety net for hidden debt—any failure would directly undermine the foundation of public welfare and government operations.Tightening the newly opened loopholes effectively safeguards the fundamentals for localities with limited financial resources.

Next, consider the local “involution.” In the past, regions competed over fund sizes and subsidy levels—if you offered a 1.5x return on investment, I’d offer 2x; if you valued a project at 500 million, I’d dare to value it at 800 million. Everyone scrambled into hot sectors, driving project valuations ever higher, spending money left and right without actually attracting the industries they sought.Only by standardizing the rules can this cycle of mutual price-inflating be brought to a halt.

Another aspect that’s easily overlooked is the relief it provides to grassroots officials. In the past, not establishing a fund was seen as a lack of initiative, which forced some counties that were fundamentally unqualified to proceed anyway. Now that higher authorities have taken over the approval process, grassroots officials no longer have to shoulder this dilemma alone.

05 Counties and Districts Return to Their Proper Roles

The State Council General Office’s “Document No. 54” should not be overinterpreted. It tightens restrictions on the arbitrary establishment of new investment channels by counties and districts; it does not reject investment promotion through funds per se.

The document does not state that funds cannot be used; it merely requires that rules be established and capabilities enhanced before discussing further development.

A close reading of the document makes this clear: it requires provincial and separately listed municipal governments to coordinate the layout of funds within their jurisdictions; regions where existing funds of the same type are already sufficient must not establish new ones; efforts must be concentrated on integrating and optimizing existing funds; and at the same time, responsibilities—who initiates, who approves, and who is accountable—must be clearly defined.

Fund-based investment promotion is transitioning from an extensive phase—characterized by grassroots-level entities acting independently and spreading resources thinly—to a standardized phase marked by provincial-level coordination, quality improvement of existing funds, and clear alignment of authority and responsibility.

This “one-province-as-a-whole” approach has precedents.

A review of local debt resolution efforts reveals that although Jiangsu has the highest debt burden in the country, it has rarely experienced debt defaults. This is precisely due to the province assuming overall responsibility and adopting a “one-province-one-plan” approach, ensuring that risks in individual districts or counties do not disrupt the financial environment of the entire region.The fund initiative follows the same logic: pooling funds currently scattered across various counties and coordinating their allocation at the provincial level is more stable and professional than having individual counties act on their own.

More professional players are also beginning to reinterpret the rules.

The Shenzhen Angel Fund of Funds has already taken the lead by introducing measures to “comprehensively relax reinvestment requirements.” General Manager Li Xinjian stated bluntly: “Against the backdrop of a unified national market, the traditional logic of fund investment promotion is no longer sustainable. Government-guided funds should return to their role as ‘guides’ rather than dominating the market.”

Li Yutong, General Manager of Guangzhou Nansha Industrial Investment, also admitted that under the early “Guidance Fund 1.0” model, market-oriented GPs faced significant challenges. The requirement for comprehensive investment promotion services interfered with normal investment strategies, even forcing them to invest in some less-than-ideal local projects.

Accompanying this shift was the entry of state-backed funds.

In July 2025, the National Venture Capital Guidance Fund, with a registered capital of 100 billion yuan, was established, and three regional funds were launched in Beijing, Shanghai, and Shenzhen, respectively. The rules are shifting, and the value of fundraising capabilities that rely on familiarity with local reinvestment policies and expertise in negotiating with districts and counties is rapidly depreciating.

One industry insider bluntly stated that the Matthew Effect will accelerate: top-tier institutions will secure better capital resources, while bottom-tier institutions will have their county-level funding sources cut off; those in the middle, who rely on government connections to stay afloat, will be the first to feel the pressure.

For counties and districts, the path forward has actually become clearer.

Instead of blindly stepping in as operators, they should integrate into the fund systems of higher-level authorities and help provincial governments identify and connect with genuinely promising local projects.

While this may seem like a step back, it actually involves handing over the financial management—an area where they are least skilled—to more professional parties, allowing them to refocus their efforts where they are most needed. They should manage existing state-owned assets effectively, support local特色 industries, strengthen the infrastructure of industrial parks, and gradually build a solid reputation for their business environment.

Whether enterprises are willing to come and whether they stay ultimately depends on the business environment and the foundation of the industrial chain—not on how large a fund a local government holds.

In Closing

A few years ago, the finance director of a county in southern China ran back and forth to secure an industrial fund, even leading a delegation to Hefei specifically to learn from their experience. In the end, that partnership fell through, but establishing the fund became the local government’s primary lever for driving development.

Now that this shortcut has been blocked, the real challenge has come to light. The purpose of hitting the brakes is to prevent the vehicle from rolling over on a curve.

We are currently in a critical phase of debt resolution. If counties cannot fill this capital gap and fail to break free from their deeply ingrained infrastructure-centric mindset, they will easily find themselves trapped in a cycle of debt resolution, stagnation, and renewed borrowing.