China PPP Fund Invests 90% of Capital in Wealth Management Products

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A new report from the Chinese central government highlights a range of risks  in relation to the country’s public finances.

On 20 June China’s National Audit Office (NAO) released the “State Council Audit Report Concerning 2017 Central Government Budget Execution and Other Financial Receipts and Expenditures” (国务院关于2017年度中央预算执行和其他财政收支的审计工作报告), revealing a number of problems that continue to plague the country’s public finances.

Chief amongst them is the use of some government funds to make investments in shadow banking vehicles due to a lack of sound industry projects.

Chinese governments at various levels have established a number of investment funds in order to spur the development of strategic industries, oftentimes in collaboration with private capital, targeting areas such as integrated circuits, advanced manufacturing and small and micro-enterprises.

According to the audit report the National Emerging Industry Venture Investment Guidance Fund (国家新兴产业创业投资引导基金) and the Advanced Manufacturing Investment Fund (先进制造产业投资基金) have made investments of 400 million yuan and 1.5 billion yuan respectively.

Other government funds have proved far less effective however, with the China PPP Fund (中国政企合作投资基金) established in March 2016 placing 63.9 billion yuan, or 88.7% of paid-up capital, in wealth management products as of the end of 2017.

Ji Fuxing (吉富星) chair of the Public Economics and Investment and Finance Research Center at the Chinese Academy of Social Sciences, said to 21st Century Business Herald that said that the biggest problem with government industry fund lay in a lack of sound investment targets, particularly in areas such as the tech sector, leading multiple parties to vie against each other.

Industry funds established by local governments are often subject to regional constraints, while Ji also points to a lack of market-based operation as an issue, particularly in areas such as decision-making, valuation and performance assessments.

“Following their establishment, a very large number of government investment funds suffer from the problem of idle capital due to inability to find inappropriate investment projects,” said Wen Laicheng (温来成) from the Zhongcai – Pengyuan Local Finance Investment and Funding Research Institute.

“Funds established by local governments also suffer from a certain level of blindness when it comes to areas such as robotics or clean vehicles, and we need to prevent another round of industrial overcapacity.”

NAO’s audit report also found that some of China’s local governments are continuing to raise debt in breach of regulations, despite the central government cracking down on risk in this area following last year’s National Financial Work Conference.

Finance minister Liu Kun (刘昆) said that Beijing would adopt effective measures to firmly contain covert debt growth, actively and appropriately reduce the hidden debt balance, as well as strengthen regulation and accountability, strictly deal with debt-related malfeasance, and forcefully punish illegal conduct.

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