The Sword of Government Funds: How Hefei City Won the Investment War

By Yan Meng

In Hefei, local authorities have established a market-oriented, government-guided industrial investment fund to attract strategic industries to settle down. And it’s turned the county into a multi-trillion-yuan GDP contributor. But what is the Hefei style? Why does it prove so successful? And are there other local Chinese governments that can do the same?

An Investment Mindset for a Municipal Government

Hefei style lets local governments bring in an industry using an equity/venture investment method and then cultivate it like an investment bank would. They use a large sum of investment funds to fish out industry shapers first, and then sell the equities for multiple returns to invest again. Write a big-sized check, and secure a mature industry — that is how Hefei won the investment war.

Betting Big on Tech

Government-guided equity investment funds, private capital, angel investment, industrial investment funds, and portfolio management; combine them all and you get Hefei’s multi-dimensional tech-investing methodology.

Hefei municipal government bet big on BOE Technology Group, ChangXin Memory Technologies, and Nio the car company. Their rewards were advanced display, semiconductor and new energy vehicle industries, which subsequently boosted local employment and industrial upgrading for local economic structure.

The Steps to Success

Undeniably, Hefei has done something special and correct. We see six steps to Hefei’s success:

1. Target the right industry

2. Respect the way an industry develops

3. Use government funds to rope in private capital

4. Seek a smooth cash-out in the capital market

5. Pocket principals and yields to invest in the next one

6. Form a virtuous cycle

To further illustrate, we examine the three major investment platforms under Hefei municipal government. In cooperation with CITIC and China Merchant Capital, the platforms have accumulated investment funds amounting to nearly CNY100 billion ($15.6 billion) and cultivated numerous emerging industries thanks to supportive policies in terms of capital, land, talent, financial discounts and tax reductions. We’ll find out how, within a decade, Hefei has gone from being just a “large country” to a trillion-yuan GDP contributor.

1. Hefei Industry Investment Group

Hefei Industry Investment Group has developed an industry-centered and innovation-driven strategy capitalizing on opening-up and investment vehicles.

It has incubated industries such as integrated circuit (IC), intelligent voice, and resource recycling & ecological disposal. It has participated in investing and construction of innovation units, including Hefei Ion Medicine Center, the smart energy innovation center and the big genome center. It has opened up itself, taking Hefei International Land Port as its handle. And it has established investment vehicles such as venture investment government-guided funds and angel investment funds.

2. Xingtai Capital

Hefei has a municipal industrial investment fund, which has expanded from CNY272 million ($35.5 million) to CNY2.977 billion ($462.8 million). The government-guided fund, or more exactly fund of funds, has invested in 12 sub-funds with a total capital commitment of over CNY22 billion ($3.4 billion) and underlying assets of nearly 100 firms. Among the CNY4.5 billion ($699.6 million) in invested capital, nearly CNY2.5 billion ($388.7 million) is injected within Hefei, accounting for 55%.

The omnipotent asset operator behind this huge success is Xingtai Capital, a professional private equity investment company under Hefei Xingtai Financial Holdings. Since appointed as the government-guided fund manager in January 2015, Xingtai Capital has evolved from a micro company with 3 staff members to a mature company with 28 team members, during which the assets-under-management (AUM) climbed rapidly from CNY300 million ($46.6 million) to CNY10 billion ($1.6 billion).

3. Hefei Construction Investment and Holding

Hefei Construction Investment and Holding was well known in the market. Its historic betting on BOE Technology Group alone set itself as an example for urban construction investment companies nationwide.

Hefei Construction Investment and Holding was formally established in June 2006 with a registered capital of CNY12.647 billion ($2.0 billion). At present, it has 50 wholly owned or controlled subsidiaries. By the end of 2019, its net asset value reached CNY187.484 billion ($29.2 billion), ranking fourth among China’s urban construction investment companies.

In the first half of 2020, its investments enabled Nio to locate its headquarters in Hefei and tempted Ofilm Optical and Optoelectronics Industry Park to reside there as well. This has injected new impetus to the high-quality economic growth of Hefei.

Exploring the Investment Cases That Secured Hefei’s Success

As mentioned earlier, BOE Technology Group, ChangXin Memory Technologies, and Nio are the three well-known cases featuring Hefei style.

  • BOE Technology Group

In 2008, BOE Technology Group faced stiff price competition from foreign rivals. In response, it planned the 6th generation TFT-LCD panel production line. But it alone could not bear the heavy burden of costs given — it turned negative profits at that time.

Back then, Hefei was one of the three national electronic household appliance manufacturing bases. It decided to bail BOE Technology Group out. It suspended an ongoing subway construction plan and injected a third of its annual fiscal revenue into BOE Technology Group.

The good news was that BOE Technology Group made the right decision about the 6th generation line. It soon hit a turning point and then upgraded further to the 8.5th gen and then the 10.5th gen. Moreover, glass substrate, polarizer and modules companies along the industry chain were also situated in Hefei, and they formed a CNY100 billion-level industry cluster.

As a kind of payback, by the end of 2017, BOE Technology Group invested over CNY100 billion ($15.6 billion) in Hefei. The latter once had a floating profit from its investment in the former of up to CNY10 billion ($1.6 billion).

  • ChangXin Memory Technologies

In 2016, when China had neither talent nor technology in DRAM memory chips, Hefei conceived to march into that realm. Understanding that DRAM is an irreplaceable key component of electronic products, it would break the market monopoly held by three giants Samsung, SK Hercules and Micron Technology.

In 2017, Hefei contributed 75% and GigaDevice contributed 25% to set up a joint venture, ChangXin Memory Technologies. Invested capital altogether surpassed CNY100 billion ($15.6 billion) — Hefei almost sold its government building.

In 2019, ChangXin Memory Technologies paid for full-set patent authorization and announced the start of mass production of 8GB DDR4 RAM. Later, when developing Changxin IC manufacturing base, Hefei Airport IC Supporting Industrial Park was included as a part of the base. In the park, chip design, equipment, materials, seal testing and intelligent terminal sub-industries along the IC industry chain received invested capital of CNY20 billion ($3.1 billion), bringing Hefei another CNY100 billion-level industrial cluster.

  • Nio

In early 2020, Nio was on the brink of bankruptcy due to a cash-flow shortage. Beijing and Zhejiang refused to help, and so did traditional automobile giants such as BAIC, GAC and SAIC. However, Hefei reached out to Nio and made a CNY7-billion ($1.1 billion) equity investment, gaining 24.1% of the shares in Nio.

It was quite a controversial investment at that time, but Nio proved that Hefei had made a worthwhile decision. After the bailout, Nio saw its sales volume and stock price swell from $2.63 on April 30, 2020, to $66.99. Nio itself even overtook BMW and Mercedes Benz, becoming the fourth-largest car company in the world.

Hefei isn’t alone. We can see their style of investment in other local governments in China, too. And in the next piece, we will provide more case studies to introduce how others have done something similar and made the correct bet on investment targets.

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