China´s State Council, the state´s highest administrative body, has encouraged government agencies to act more as venture capitalists, it announced on Tuesday. A receipcy for disaster, says financial and political expert Victor Shih to Bloomberg, where the tax payers have to suffer from inavoidable disasters.
The government’s move deeper into venture capital comes with risks though. The impending influx of cash risks stoking a boom-and-bust cycle, similar to previous government-led efforts in solar and wind power. Public agencies may also come under pressure from officials to put money into the projects of friends or relatives, increasing the chances that taxpayers are hit with losses.
“The biggest problem with these government venture and even so-called private equity is that like most things in China, it’s not concerned about profitability and economic efficiency,” said Victor Shih, a professor at the University of California, San Diego who focuses on Chinese politics and finance. “If these funds are funded by credit, they will end in disaster because no one will have any skin in the game, which will open these funds to abuse.”…
The amount of state capital threatens to overwhelm the private firms. Chinese government-backed venture funds tripled their money under management in a single year to 2.2 trillion yuan ($330 billion) in 2015, according to consultancy Zero2IPO Group.
The State Council in Tuesday’s document emphasized the need to prevent investment bubbles and thwart illegal fundraising, both major risks in a country where mom-and-pop investors tend to dominate stock market trading and often use their smartphones to invest more than $1 trillion in personal savings. “It’s very ambitious,” said Shih. “But down the road there might be very serious losses, and it’s government money, so tax payers will take a loss.”
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Earlier this year we discussed with innovation expert William Bao Bean whether the government funding new projects was a smart idea. The best the government can do is getting out of the way, he says.