China Introduces Negative List to Guide Gov't-Backed Fund Investments

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China is moving toward implementing stricter regulations to better oversee its nearly 10 trillion yuan (approximately $1.4 trillion) market of local government-sponsored investment funds. A proposed negative list aims to prevent misguided investments and ensure more prudent management.

The country’s top macroeconomic planning agency recently released two draft regulatory documents designed to reduce poor investment choices and boost returns. Public feedback on these proposals is encouraged before August 28. One draft provides guidance on investment directions, while the other establishes standards for the management and evaluation of fund operators.

These government investment funds are financed solely by local authorities or in partnership with private capital. They typically utilize market-based strategies, such as equity investments, to attract private sector involvement, support targeted industries, and promote innovation and entrepreneurship.

As of last December, nearly 2,180 government-guided funds existed across the country, with a target size of roughly 12.84 trillion yuan (around $1.79 trillion) and an actual subscribed capital of about 7.70 trillion yuan (roughly $1 trillion), according to venture capital research firm Zero2IPO Research.

The proposed negative list would restrict funds from investing in sectors deemed sensitive or in decline, including highly polluting chemical plants and small, inefficient mines. When investing in emerging industries, the rules would caution against trend-chasing to prevent rash decisions. Additionally, a single government agency would be prohibited from creating multiple funds targeting the same industry or sector.

Local governments would also be barred from using these funds exclusively to attract outside investment or to take actions that conflict with the goal of establishing a unified national market. Funds set up by regional authorities would be restricted from making investments that could indirectly increase hidden government debt. They would also be forbidden from investing in stocks, futures, or derivatives markets, as well as engaging in illegal guarantees or risky investments that could expose them to unlimited liabilities.