Help Not Wanted

Zhou says more financing will be made available for the nation's newest high-tech companies. Bad move.

Zhou Xiaochuan has a lot on his plate. As governor of the People's Bank of China, the central banker is needed to deal with all manner of economic challenges, from the country's currency to its banking system, property market and, of course, macroeconomic growth.

Boosting the nation's high-tech startups? Not so much.

That hasn't stopped him trying, with comments over the weekend that Beijing will work to promote direct financing for high-tech startups. His deputy, Pan Gongsheng, went further, declaring that China needs more diversified financial products to support entrepreneurship and innovation.

As concerns swirl over China's ability to make its GDP growth target amid weaker industrial output and slowing retail sales, one could be forgiven for thinking a lack of money was holding back the country's newest businesses.

Nothing could be further from the truth.

Thanks to authorities' fiscal enthusiasm, at least 780 government-backed funds had a total of 2.2 trillion yuan ($339 billion) in assets at the end of 2015, data from Beijing-based consultancy Zero2IPO show. Incredibly, two-thirds of that was raised over the past 12 months.

Spurred not only by government-backed funds, but also local and foreign venture capital firms and increasingly hungry M&A departments at the B.A.T. triumvirate (Baidu, Alibaba, Tencent), China's birthing of big, valuable startups boomed last year, according to data from CB Insights.

Flying Unicorns

China's unicorn count has grown exponentially

Source: CB Insights; data shows cumulative no. of Chinese unicorns based on date of first reaching $1b valuation

Although counting unicorns -- startups with a $1 billion valuation -- isn't the only, or even the best, measure of entrepreneurship and innovation, it does provide an indication that money is both available, and actually being spent.

What the unicorn count doesn't show is how many startups are being established in the first place. With all that cash fighting over a limited supply, it's easy to see how valuations can climb quickly.

President Xi Jinping and Premier Li Keqiang have both made it clear that building the country's technological independence is of utmost importance. That goal was given greater urgency twice in the past month after the U.S. sent a clear signal that China's money wasn't welcome in its tech industry, and that it would cut off the supply of technology to Chinese companies to further its own foreign policy goals.

Against that backdrop, the buy versus build trade-off starts to turn squarely in favor of build. So that's what China's been doing. Of course, funds under management doesn't mean funds being invested, and much of that cash is likely burning holes in pockets (read: sitting in accounts at state-owned banks).

To Zhou's credit, the government's moves to make more money available --  through cutting interest rates, reducing home down payments and lowering taxes -- has helped boost property sales. If construction follows, then the property party may just start again, with state lenders left with the hangover.

China's Home Sales Boom

Making more money available helped boost the property market last year

Source: Bloomberg data via China's National Bureau of Statistics

Building businesses and building apartments, however, aren't the same, and that's a good thing. China needs more new businesses, it doesn't need more empty buildings.

In calling for easier funding for entrepreneurs, Zhou may be worried that so much of the country's finances have gone toward propping up huge state-owned enterprises, sucking resources away from small businesses that are crucial to growth in any economy. It's a valid concern.

But as history has shown, throwing cheap money around often creates more problems than it solves. And for the PBOC, more problems is exactly what it doesn't need.

    This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Tim Culpan in Taipei at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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