The State Council's Document No. 1 Snapped Its Fingers, Still Waiting for More Echoes

By Zhiyan Chen

Edited by Jing Liu

In the first workweek of the new year, the venture capital industry received the State Council's Document No. 1. On the evening of January 7, the General Office of the State Council officially issued the Guiding Opinions on Promoting High-Quality Development of Government Investment Funds (hereinafter referred to as the Guiding Opinions). For the current primary market, the document addresses long-standing pain points — from extending fund performance evaluation cycles and prohibiting the establishment of government investment funds for investment attraction purposes, to diversifying exit channels and optimizing fault tolerance mechanisms — responding to problems that have plagued government guidance funds and local market-oriented institutions in recent years.

For some time, people in the industry have joked that venture capital seems to be a sector that "hasn't made it to the table," partly because guidance documents addressing it have been relatively scarce. From this perspective, as the first national-level guidance document for government investment funds, the Guiding Opinions first establishes a keynote for such funds: in major strategies, key areas, and weak links where the market cannot fully play its role, the goal is to "attract and mobilize more social capital."

Moreover, the pattern where government investment funds were dominated by local governments will change, with greater emphasis on "improving, rationalizing, and optimizing" coordination efficiency.

From the above, this seems like good news for top-tier funds: government funds are further adjusting their positioning from "leader" to "guide," and communication and coordination should become simpler. But for mid- and long-tail funds, some believe this could further exacerbate their fundraising difficulties.

On this topic, Anyong Waves spoke with Libo Guo, founder of LP投顾, and Tian Zhang, founding partner of Amber Capital, selecting several of the most noteworthy issues.

It should be noted that as a guiding document, the Guiding Opinions establishes policy direction for regulating the expansion of government investment funds, but much follow-up action is still needed for actual implementation. The snap of fingers that arrived this night still awaits resonance before it becomes reality.

What is the alternative path beyond investment attraction?

Article 17 of the Guiding Opinions states that government investment funds should not be established for the purpose of investment attraction, encourages the removal of registration location restrictions for such funds and their managers, and calls for strengthening credit constraints in accordance with laws and regulations.

As land sale revenues have declined, establishing government investment funds as a substitute for direct investment attraction — with sub-fund GPs effectively becoming "unofficial investment promotion offices" — has become a widespread tactic for local governments to boost economic metrics. This has led to wasteful phenomena including malicious competition, redundant construction, and excess capacity. The requirement to eliminate investment attraction targets in the Guiding Opinions essentially demands that local governments leverage social capital through "government funding + industrial characteristics." This undoubtedly sets a higher bar for local governments' vision and capability in revitalizing existing industries.

Tian Zhang's assessment is that investment attraction will enter a winter for regions without existing industrial chain advantages, further solidifying the current geographic distribution of industries nationwide.

Additionally, from the perspective of feasibility within local government internal evaluation metrics, investment attraction is a relatively concrete, hard indicator. Therefore, using fund structures to fulfill investment attraction tasks has been driven by the practical needs of industrial upgrading and development across regions, and has largely been reasonable. If fundraising for investment attraction funds is no longer possible, local governments will lose an important fund instrument in their transition from "land finance" to "equity finance."

In implementing the Guiding Opinions, will there be other viable economic performance metrics to serve as leverage and incentivize local governments to establish and improve investment funds? Libo Guo told Anyong Waves that obtaining effective, timely, and objective industry empowerment evaluation indicators at the grassroots government level is currently quite difficult, and acquiring authoritative relevant data would require considerable time and research costs.

How to coordinate multiple regulators while maintaining distinct responsibilities?

Article 15 of the Guiding Opinions calls for improving fund performance management, with a focus on "comprehensive achievement of policy objectives"; Article 16 calls for establishing and improving fault tolerance mechanisms, following the laws of fund investment and operation, tolerating normal investment risks, and optimizing full-chain, full-lifecycle evaluation systems.

In recent years, local governments have often spoken of equity investment with a "tightening spell," with keywords like "audit assessment," "no loss of state-owned assets," and "lifetime accountability." This has contributed to the wave of lawsuit-driven buybacks in 2024. Although some provinces and cities have already issued policies on fault tolerance mechanisms, in practice there remain considerable disagreements between state asset supervision, audit, discipline inspection, and other departments on one side and fund managers on the other. How to get all departments to "align their granularity" on government investment funds is a crucial process for achieving professionalized, market-oriented operations.

"Pure fiscal funds have a certain degree of flexibility, but once state-owned assets are involved, regulation becomes much stricter. In many cases, the nature of funds is intertwined, which affects managers' perceptions," Guo believes. After the issuance of the Guiding Opinions, the Ministry of Finance should develop more specific rules around local government performance and fault tolerance, the National Development and Reform Commission around credit building and information statistics, and the China Securities Regulatory Commission around registration and filing.

"The Guiding Opinions is not the first to mention the professionalization and marketization of government investment funds, but implementation definitely requires multi-departmental coordination."

How to prevent involution?

The Guiding Opinions' general requirements call for improving tiered and categorized management mechanisms, rationally coordinating fund deployment, and preventing homogenized competition and crowding-out effects on social capital. Article 17 also clarifies the need to optimize the fund development environment and implement the deployment of a unified national market.

Previously, government investment funds lacked top-level coordination and planning, leading to homogenized competition and severe investment attraction involution across regions. At the core of this phenomenon is the stress response triggered by China's entry into an era of stock-based growth.

Under the current "unified national market deployment," the reality of finding opportunities and resources within existing stock has not changed. How to maintain orderly regional competition while considering the big picture? How to reconcile industrial guidance capabilities across developed and underdeveloped regions with different resource endowments? These are real problems that need solving in implementing the Guiding Opinions.

Tian Zhang believes that if the provisions of Document No. 1 are fully implemented, we will likely see increasingly strong Matthew effects among central enterprise funds, developed provincial- and municipal-level funds, and funds in regions with industrial advantages — thereby producing crowding-out effects on fund development and industrial upgrading in the vast majority of ordinary regions. "This deserves continued in-depth discussion among all parties."

How to avoid risk extremism?

Article 3 of the Guiding Opinions states that the development of venture capital funds should be encouraged. Venture capital funds should focus on developing new quality productive forces, support technological innovation, and concentrate on investing early, investing small, investing for the long term, and investing in hard technology.

Currently, domestic government investment funds suffer from an imbalance: an oversupply of industry guidance funds and a shortage of venture capital funds. This relates to local governments' relatively conservative risk appetites and the stronger economic leverage that industry guidance funds can provide.

Going forward, venture capital funds will receive more policy encouragement during implementation of the Guiding Opinions. In this process, how to avoid swinging from one extreme to another, and how to prevent risk extremism, will require more scientific supervision mechanisms and fault tolerance rules.

On another front, Libo Guo believes that government investment funds should take on the responsibility of becoming evergreen funds, maintaining investment continuity from early stages through follow-on investments and recycling. At the same time, subsequent implementation of the Guiding Opinions should add specific mechanisms for concessions and profit-sharing for venture capital funds, to put "encouragement" into practice.

How to adapt to the "guide" role?

The Guiding Opinions' general requirements clarify the need to highlight government guidance and policy positioning, and to standardize the operation of government investment funds according to market-oriented, rule-of-law, and professional principles.

In our interview with Guo, he repeatedly noted that China's government investment funds lead the world in both number and scale. However, this has not been an active choice by local governments, but rather a consequence of their increased weight in an environment where the primary market has contracted in recent years.

But the Guiding Opinions has now made clear: "Give full play to the decisive role of the market in resource allocation, better leverage the role of government, and promote a better combination of effective markets and capable government." This also demands a shift in mindset from local governments accustomed to being jokingly called "sugar daddy" or "thighs" by GPs. After all, the government's role is to "guide" rather than "lead," and it must still do a good job as a guide for social capital.

Image source | IC Photo