The Chinese state is pumping funds into private equity

STATE CASH is burning a hole in the pocket of Shenzhen’s Communist Party secretary. Wang Weizhong told angel investors late last year that if they set up a fund in the south China tech hub, the government would bear 40% of their losses. For the monstrous 400bn-yuan ($62bn) state fund backing such activity, an investment of 3m yuan—the size of a typical angel investment—is a rounding error. For private investors the invitation sounds too good to be true. It might be.

After several years of loose monetary conditions and bumper dealmaking, liquidity in private equity (PE) in China began to dry up in 2018. New regulations made it harder for banks and insurers to invest. So-called “government-guided” funds set up by local governments or national ministries, by contrast, thrived. Local authorities were encouraged to launch such investment vehicles to lure startups to their cities, along with talent, technology and, eventually, tax revenues. Owing to a lack of in-house investment talent, most of them have acted as limited partners (LPs) in private-sector funds.

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...