China venture capital fact of the day

by on March 10, 2016 at 2:25 am in Economics, Web/Tech | Permalink

China is getting into the venture capital business in a big way. A really, really big way.

The country’s government-backed venture funds raised about 1.5 trillion yuan ($231 billion) in 2015, tripling the amount under management in a single year to 2.2 trillion yuan, according to data compiled by the consultancy Zero2IPO Group. That’s the biggest pot of money for startups in the world and almost five times the sum raised by other venture firms last year globally, according to London-based consultancy Preqin Ltd.

The money’s in what are known as government guidance funds, where local and central agencies play some role. With 780 such funds nationwide and a lot of experimentation, there’s no set model for how they’re managed or funded. The bulk of their capital comes from tax revenue or state-backed loans.

The article is here.  If you are both impressed and worried at the same time, that is the correct reaction.

1 Ray Lopez March 10, 2016 at 2:56 am

What can they invest in? I suspect this is just a PR ploy, unless they plan to buy Pebble Beach from the Japanese.

Bonus trivia: China is Japan’s #2 export market, tied with the USA. I didn’t know, did you?

2 So Much For Subtlety March 10, 2016 at 6:16 am

Come on. We all know that girlfriends, mistresses and cousins, not necessarily in that order, will be setting up new enterprises and getting a lot of funding.

This is not rocket science. Who seriously thinks this will turn out any other way?

3 Ray Lopez March 10, 2016 at 11:15 am

Very true. In Greece, during the pre-2008 times, there was a EU-led push for solar energy (sunny Greece lags even and especially cloudy Germany in solar energy production per capita; it turns out this is typical of ‘poor countries’, and coal for example is the preferred power plant fuel for both hydro-rich Tibet, Laos (with a few new exceptions) and geothermal rich Philippines, but I digress).

In our little home town outside of Athens, who got the cheap loans for the solar energy to electricity panels, which cost a couple of hundred thousand euros? The mayor, his cronies, relatives, friends, allies and the like. In 2-3 years the solar power sold to the local electricity company at high rates paid for the loans; the rest is profit for the owner. I knew a few ‘farmer George’ rednecks who became euro millionaires from this scheme. Also not everybody could qualify for the loans: you need a certain certified geologist to certify your land gets maximum sun exposure, and of course the geologist is friends with the mayor and his cronies. The EU’s taxpayers are the bag holders for assuming risk for little return, but ultimately it’s the GR electric utility customers who pay subsidized power generation rates to solar energy producers. Green gold.

4 TMC March 10, 2016 at 11:54 am

Did they call it Solyndra?

5 asdf March 10, 2016 at 3:08 am
6 Andrew M March 10, 2016 at 3:35 am

How is this ultimately different from government “picking winners”, which (most) economists tell us is a bad thing?

7 Harun March 10, 2016 at 11:21 am

I’d imagine when the state has but a single fund, people watch it closely.

When there hundreds, people don’t care.

Expect a lot of brother-in-law has an app ideas to be funded.

8 anon March 10, 2016 at 5:30 am

I am impressed, and a little worried. Based on my superficial knowledge of Chinese tech industries, I think about half this money could end up well spent, which is a lot.

Perhaps I am an optimist that I think this in turn could increase welfare worldwide. Facebook and Walmart would probably not be losers. Maybe Apple or Tesla.

Maybe we should not have pushed post-commies into a patent and IP framework.

9 Axa March 10, 2016 at 7:01 am

Even if the money is well spent, benefits may come in medium-long term while debt troubles is a very short-term issue. May be good for innovation but it’s not the way to solve short-term issues.

10 Thomas March 10, 2016 at 10:54 am

Lol. You think that venture capital done by about ideological organization with other people’s money could improve global welfare in principle.

11 Nathan W March 10, 2016 at 11:57 am

Well, lots of capitalists are pretty ideological, and we commonly assume that they can use other people’s money to improve global welfare, in principle.

12 Thomas March 10, 2016 at 12:36 pm

Which is it, are capitalists ideologically or profit motivated? I can’t keep up.

13 Nathan W March 10, 2016 at 11:59 pm

Some just wanna make a buck, others are very ideological. The world is not black and white. Did I say “all (group X) are like…”? Not even close. There’s a big difference between discussing personal responsibility and incentives (a valuable contribution from the right), and blind faith that relatively unfettered markets always deliver the best solution regardless of concerns about externalities, collusion, or a corrupted lobbying process.

14 chuck martel March 10, 2016 at 5:59 am

State-supplied venture capital funding. The decision-making process is very opaque, at least to us and probably to the average Chinese as well. The decisions are made by individuals and there’s little outside knowledge of their acumen or philosophical leanings. In fact, that’s the case in the US, too. Only the actions of the biggest movers and shakers become public knowledge. We won’t know of the success or failure of Chinese start-ups until they’re either established or history. While American corporate managerial types siphon off as much as possible of available funds, the Chinese system will include their own counterparts plus the government apparatchiks that approve the funding. Lots more fingers in the pie.

15 anon March 10, 2016 at 6:23 am

Exactly. Anyone who thinks American “incubators” are efficiently funding innovation has not met too many incubators. Etc.

16 Lord Action March 10, 2016 at 9:44 am

There are VC types who won’t touch anything associated with an incubator. I’m beginning to think they’re right.

17 Thomas March 10, 2016 at 12:38 pm

Could you explain the micro-foundations for individual investors making poor investments? It’s really easy to explain why bureaucrats make poor investments.

18 Nathan W March 11, 2016 at 12:13 am

Percentage of startups resulting in failure. Whatever data you get will understate the problem, because sooo many people sorta start startups and fail before they’re hardly even through the gates.

19 anon March 10, 2016 at 6:24 am

Oh, don’t forget the lovely skim possible at “hackathons.”

20 Lord Action March 10, 2016 at 9:43 am

Canada has similar state venture funding. It’s a cesspool of corruption. People make careers out of bilking them.

http://www.dec-ced.gc.ca/eng/index.html
https://en.wikipedia.org/wiki/Atlantic_Canada_Opportunities_Agency

21 Mark Thorson March 10, 2016 at 10:37 am

It seemed to work well at ARPA, though that was in an era of low-hanging fruit. There’s low-hanging fruit in China right now — energy crisis, air pollution, water pollution, etc. Other places have those problems too, but right now those are monumental challenges in China. A good invention can scale fast just based on the local market, and venture capital is what is needed to make that happen. The rest of the world could benefit greatly from developments in energy and pollution made in China.

22 anon March 10, 2016 at 10:59 am

Another “exactly.” Not everything should operate on the ARPA model, but when appropriate situations exist, refusing them on principle is still a loss.

23 Harun March 10, 2016 at 11:23 am

Bricklin.

Terry McAuliffe’s green card, I mean green car venture.

Fisker.

there are many more examples of governments investing in boondoggles.

If its a good idea, private money will flow.

24 anon March 10, 2016 at 11:26 am

Youse guys.

The world is rife with error. And success. It takes blindness to think there is one rule for error. Or success.

You are the flip side of Marx, and not terribly useful to optimizers.

Solutionists.

25 Thomas March 10, 2016 at 1:33 pm

Can you explain why:

1. Private investments do not flow to profitable ideas?
2. Bureaucrats are willing to direct investments in an altruistic manner?
3. Politicians are willing to let investments be direct in an altruistic manner?

I imagine that the burden of proof rests on the side which is assuming that private investors don’t seek profits and/or that politicians will act altruistically. Maybe I’m just being an ideological nutjob here when I point out how absurd and contrary to reality your preference for government direct investment is.

Say, you don’t happen to benefit from government grants do you?

26 anon March 10, 2016 at 1:40 pm

You only need a basic experience of the world to know that human institutions, of all types, sometimes succeed, sometimes fail, and sometimes muddle along.

If fact, with that basic experience of the world, it is truly bizarre to require “foundations” for it, beyond simple human nature.

27 anon March 10, 2016 at 1:45 pm

BTW, since I never stated a “preference for government direct investment”.

To be clear, I like the American “mixed” system. We are what, around 1/3 government spending 2/3 private? I’m not sure that is necessarily wrong. And perhaps that’s the real problem you have with me, that I’m not ready to reject the American system, or pretend is is something else.

28 Nathan W March 11, 2016 at 12:35 am

Thomas – your preference for entering into strawman-land seems to know no bounds.

No one argues that private businesses do not seek profit, but this does not always mean that they succeed. Moreover, many believe that certain areas are not well serviced by private markets, and hence endorse government activity in these areas (the most obvious example being education).

Moreover, exceedingly few people believe that politicians are, as a general rule, altruistic. Rather, it is commonly understood that both corporate and union money tend to corrupt the political process. However, many are perfectly able to identify those politicians whose policy preferences display that they are not corrupted by such influences (although such politicians tend to be few in number, in particular under American political financing rules).

On the matter of bureaucrats – naturally, we will expect certain corrosive influences do to things generally defined under “mission creep”, or a naive belief that whatever one happens to be interested in working on is indeed the best place to allocate additional public resources (however, we should absolutely expect, nay, encourage them to advocate as best as possible for the value they provide, since such information can serve as an informational input for decision makers). Entire streams of Marxist writing explore in great detail the tendency of bureaucracy towards corruption, leading “thinkers” (a general, rather) like Mao to suggest that quintennial revolution was the only way to keep things clean (of course, he changed his mind on this once he became king of the castle).

The burden of proof lies on both sides of the argument. Claiming “I don’t need to prove it but you do” is completely biased. I’m pretty pro market (but not anti-interventionist as a matter of practice), but it is in the face of evidence, not gut instinct, that I am generally convinced that market forces should play a strong role in every economy. On the matter of who bears the burden of proof, it is the person who makes strong claims without evidence, and in this case that is you.

29 Mark Thorson March 10, 2016 at 4:44 pm

ARPA and DOD made some pretty good investments at critical times. Most of the first year’s production of logic chips at Fairchild Semiconductor were used in Minuteman missile guidance systems. Later, the first really big order for memory chips went into the Illiac IV supercomputer. Spinoffs from Fairchild can be credited with creating much of Silicon Valley.

I worked at a company that benefitted from a DOD investment at a critical point. Early in its history, Tessera got a big boost from DOD SBIR money. To a great extent, the chip-scale packaging industry that exists today was created by Tessera. DOD was repaid many times over in terms of getting the technology off the ground.

Sure, ARPA invested in a lot of duds, but overall they have probably been the most astute investors in getting bang for their buck. China would do well to follow their model, and if they skew toward solving their own problems in energy and pollution, the world stands to benefit enormously. If my electric bill someday includes a few pennies of license fees for Chinese fusion technology, hey, that’s great!

30 carlolspln March 10, 2016 at 9:35 pm

Just forty years away, Mark. Forty years.. 😉

31 Mark Thorson March 10, 2016 at 11:54 pm

Tessera was in the 1990’s, but it was only in the 2000’s that it became apparent how prescient their investment was. ARPA is still today investing in cutting-edge technologies.

http://www.theguardian.com/environment/2016/mar/03/us-agency-says-has-beaten-elon-musk-gates-to-holy-grail-battery-storage

32 rayward March 10, 2016 at 6:03 am

When sovereign funds jump into the fray, the savvy investor knows it’s long since time to sell. I’m reminded of Singapore’s sovereign fund making a big investment in China’s industrial real estate. Just before China’s industrial sector started to crash. Of course, sovereign funds aren’t the only investor carrying a flashing yellow light. When the small investor dives into the real estate market or the stock market, it’s a certainty that the end is nigh.

33 Axa March 10, 2016 at 7:06 am

I fell strange for writing this but…….profits (if they ever come ) will be private, while debt losses due to start-up failure will be socialized. That issue caused a lot of discomfort on the other side of the world back on 2008-2009.

34 R Richard Schweitzer March 10, 2016 at 9:44 am

Imagine a similar set of systems established in the U S and its several states.

Of course, the resources (funds) would create debt for the federal government and huge slush funds in the allocations to states who did “matching programs.”

35 Yancey Ward March 10, 2016 at 9:51 am

Yeah, I am impressed that I can worry any more than I do.

36 Axolotl Jones March 10, 2016 at 9:57 am

This is (to me) a very characteristic error often made by politicians, who deal in the world of appearances: confusing the name of something with the thing itself. Giving away money is easy and fun. Investing money so that you make back your principal, much less an adequate return, is difficult. Fo insight into how this will turn out, I suggest viewing Mel Brooks’ movie: “The Producers.”

37 hoonose March 10, 2016 at 10:01 am

Is this above board debt based money, or money out of thin air?

Who nose?

38 anon March 10, 2016 at 11:30 am

The Internet says the Chinese workforce is ~800 million. If this $231 billion venture number is real it is almost $300 per worker.

That seems a lot.

39 rayward March 10, 2016 at 11:40 am

Bernanke’s suggested solution to China’s problem is what he calls “targeted fiscal policy”: China has a very high saving rate because it lacks a strong social safety net, so if China adopts a stronger social safety net, consumption will replace saving and spur economic growth. http://www.brookings.edu/blogs/ben-bernanke/posts/2016/03/09-china-trilemma?rssid=Ben+Bernanke. I suppose on this blog that idea is preposterous, since saving is what funds investment which is what spurs economic growth. But if anything China suffers from a glut of not only saving but investment, with cities to nowhere in addition to bridges to nowhere. What’s interesting about this period is the challenge to deeply-held beliefs in economics. “May you live in interesting times” is a Chinese curse that seems to have afflicted many, not only in China but across the globe including here. Of course, the irony of China’s new sovereign fund is that China doesn’t need more investment, but the U.S. does. Maybe China’s sovereign fund will invest in the U.S.

40 Nathan W March 10, 2016 at 12:13 pm

My understanding is that Chinese policymakers broadly accept the rationale that a stronger social safety net would help to drive consumption-led growth. But, I suspect that they are loathe to create long-term expectations when they are not positively certain that they can live up to them (although it is essentially heretic to suggest that the Chinese mixed economy approach may not deliver what it hopes to deliver in terms of growth and prosperity).

They recently passed a law which requires family to provide mental and financial support for elderly family, with fines and penalties for failing to do so (http://www.voanews.com/content/china-elder-care-law-a-struggle-for-one-child-families/1704200.html – just the first Yahoo hit). This does not suggest that they plan to deepen the safety net much any time soon.

I recently asked a pregnant woman about whatever financial supports the government might provide for pre-natal and post-natal care, in addition to delivery itself. She laughed at me like I was an ignoramus, saying “No, you’re your own. This is CHINA.” I’ve recently read about very small increases to state “pensions” for rural elderly, a “pension” which would hardly cover the cost of rice and tofu, let alone housing, medical care, etc. Family networks, and the social obligation to provide for the elderly are VERY strong, but in a country with 1.3 billion people, it is entirely predictable that some millions fall through the cracks.

41 Cliff March 10, 2016 at 1:34 pm

Where are the cities to nowhere? Do you mean the cities that filled up with people?

42 EB March 10, 2016 at 12:30 pm

Tyler, please explain differences, if any, between China’s venture-fund investment and

1. ARRA
2. Fed´s QE
3. ECB´s Whatever you want to call its purchases of government bonds (and now corporate bonds)
4. China State Banks´ lending of the past 25 years.

I look forward to your comparative analysis.

43 coketown March 10, 2016 at 1:25 pm

I am less and less impressed by China’s willingness to throw obscene amounts of money at headline-grabbing endeavors, and more and more worried. This should be filed with the same factoid showing China publishes more scientific papers than anyone else. It’s the illusion of innovation and progress. Potemkin Funds. Any new instance of “Chinese government-backed loans” makes me quite worried.

44 jseliger March 10, 2016 at 2:28 pm

If you are both impressed and worried at the same time

Yes. The size is tremendous but size matters only if it’s used well. Y Combinator got started with a tiny amount of money. So too did many, many contemporary big companies.

The number of companies that raised huge amounts of money and wasted it is also notable.

45 Vera March 10, 2016 at 6:53 pm

Will this spill over to Australia do you think (Tyler or anyone else)? They are investing in property in Australia at amazing rates but the prices in Sydney and Melbourne are through the roof and the common consensus is bubbly. But Australia has an abysmal VC environment – will China pick up the slack? Are there regulatory walls to this happening?

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