Role of Government in Start-Ups in China

Many people in the US believe that the Party funds and controls all Chinese tech start-ups. Is this belief true? What role does the government play in start-ups in China? In this blog post, I’d like to unpack this topic a bit.

Government Guide Fund

One of the government’s biggest roles is to provide capital to tech companies. It’s rare for the government to provide subsidies directly to a specific company. Usually, capital is injected via the so-called “Government Guide Fund” (政府引导基金) as an LP. Similar to corporate VCs, the “Government Guide Fund” doesn’t simply focus on capital gain; it must also achieve some strategic goals. Usually, each fund has a specific purpose—for example, to make one city the hub of batteries for electric cars.

The growth of the “Government Guide Fund” really began in 2008 after the last financial crisis. It hit its peak around 2016-2017. Currently, the AUM of the “Government Guide Fund” is roughly $300Bn. This is a significant capital force in the market. As a reference point, the AUM of all VCs in the US is about $400Bn. 

Interestingly, about 80% of the “Government Guide Fund” is set up by municipal governments. Most of them are not in Tier 1 cities such as Beijing or Shanghai. Many municipal governments were able to leverage the “Government Guide Fund” and some other taxes and regulation policies to successfully grow a certain tech industry from scratch.

Some of the “Government Guide Fund” capital comes from banks, pension funds, and LPs outside the US. It’s generally believed that the government is not going to let private investors suffer a huge loss. As a result, the cost of capital for the “Government Guide Fund” is fairly low.

Because the “Government Guide Fund” is usually just an LP, the government doesn’t have any control over the tech companies from the governance point of view.

State-Owned Enterprise (SOE)

Another typical way for the government to influence the tech industry is through SOEs. China is home to 109 corporations listed on the Fortune Global 500—but only 15% of those are privately owned. Although some SOEs are public companies, in many cases they prioritize strategic goals from the Party over pure commercial goals. As a result, SOEs can provide capital, support, and proof of concept projects to many start-ups without a short-term return. The state-owned Asset Supervision and Administration Commission (SASAC) is the largest shareholder of all SOEs. It provides guidance to each SOE in terms of its strategic goals.

However, in recent years, the role of SOEs has been decreasing rapidly.

China’s private sector—which has been revving up since the global financial crisis—is now serving as the main driver of China’s economic growth. The combination of the numbers 60/70/80/90 is frequently used to describe the private sector’s contribution to the Chinese economy: They contribute 60% of China’s GDP and are responsible for 70% of innovation and 80% of urban employment, as well as provide 90% of new jobs. Private wealth is also responsible for 70% of investment and 90% of exports.


A recent key strategic focus of the Chinese government is to adopt blockchain technology and find the killer application. To achieve this goal, various government entities have almost set up a “Government Guide Fund” that manages over $6Bn in capital to invest in blockchain companies. In the US, blockchain VC funds are raising or investing out of funds with total capital of $3.8Bn.

It all started when President Xi endorsed blockchain technology on October 29, 2019. Before his announcement, blockchain technology was really in a grey area. Most VCs were afraid to invest in blockchain start-ups from a regulation point of view.

In addition to the capital, all governments started putting together RFP to try out blockchain technology to support Xi’s endorsement. The tax agency wants to use blockchain to collect taxes, while many municipal governments would like to use blockchain to manage national ID cards. Many of these RFPs are completely crazy and most of them will fail. However, it may help the Chinese government find the killer application for blockchain technology faster than any other market.


The government in China certainly plays a much bigger role in the tech industry as compared to the US government. However, its role is limited and has been decreasing in recent years.

When we take a look at the top Chinese tech companies (Alibaba, Tencent, Baidu, ByteDance, and so on), we see that none of them have received significant support from the government. Actually, most of them are funded by US-based venture capital, and most of them operate in the most deregulated industry in China.

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