The Sword of Government Funds: Which Local Chinese Governments Adopt the Hefei Style?
In the last article, we examined the Hefei style of government investment. The local government’s special philosophy in making surprising investments has attracted advanced industry chains and spurred local employment and economic growth. But we can also see other local Chinese governments adopting the pattern. Not all the cases belong to private equity investment, as there are debt vehicles also utilized. However, our point is to consider the growing trend of governments investing and lending to draw high-potential companies to settle within their jurisdiction, while stimulating growth in related industry clusters. Some are governments’ capital injection into healthy or stressed public companies, and the rest are investments into “unexpected” rising star companies in niche markets.
1. Investing in healthy public companies
- Changsha city and San’an Optoelectronics
San’an Optoelectronics Co., Ltd. is a world-leading enterprise in the LED chip industry. It specializes in applying compound materials like GaN and GaAs to produce LED chips for lighting. And their success caught the attention of Changsha, the capital of central China’s Hunan Province.
In October 2019, Changsha invested CNY12 billion into San’an Optoelectronics both directly and indirectly: CNY7 billion into its holding company, and CNY5 billion into the company itself. Changsha even set up an investment company, Xiandao Gaoxin (limited partnership), specifically to do the direct investment, establishing it only two weeks before the move with registered capital almost equivalent to the amount invested.
San’an Optoelectronics paid Changsha back. On the evening of June 16, 2020, it announced it would invest CNY16 billion in Changsha through a subsidiary to help Changsha realize semiconductor industrialization. As scheduled, money would be spent on the R&D and industrialization of the 3rd generation silicon carbide semiconductor, including crystal growth, substrate production, epitaxial growth, microchip fabrication and packaging.
- Wuhan city and Xiaomi Group
On November 18, 2017, Xiaomi, Kingsoft and Shunwei Capital — companies all led by billionaire entrepreneur Lei Jun — officially settled in Wuhan’s Optics Valley Financial Harbor. And Xiaomi even made Wuhan its second headquarters. The city is attractive not only for its preferential policies and favorable business environment but also the local government’s industrial investment fund.
- Wuhan city and BOE Technology
BOE Technology, known as a “cash-burning machine”, is well versed in leveraging government funds. It signed an investment framework agreement with Wuhan municipal government and Hubei Yangtze River Economic Belt Industry Fund to jointly invest CNY46 billion for building a 10.5th generation TFT LCD production line in Wuhan Economic and Technological Development Zone (Dongxihu District). Of the CNY46 billion, BOE Technology had only CNY6 billion to contribute, while the other two managed to raise CNY20 billion.
Before Wuhan, BOE Technology leveraged CNY3 billion from Hefei for its CNY17.5-billion Hefei Project in 2009, CNY12.5 billion from Beijing for its CNY28-billion Beijing Project in 2010, and also considerable capital from Chongqing for its Chongqing Project later on.
2. Bailing out stressed public companies
- Foshan city and Funeng Oriental Equipment Technology
In early 2019, Foshan government’s investing platform, Foshan Public Utilities Holding Co., Ltd., acquired 26.28% shares in the predecessor of Funeng Oriental Equipment Technology, renaming it as it’s known today.
By the end of 2019, the listed company had relocated its headquarters to Chancheng District, Foshan City. It did likewise with its second level subsidiary, situating it in Chancheng district in August 2020, and the R&D center of the company as planned.
The company gained momentum after Foshan stepped in. In the first half of 2020, it even expanded its ecosystem by acquiring 88% equity of Dongguan Chaoye Precision Equipment Co., Ltd., a well-known business specializing in automated production lines for lithium batteries in China.
On December 9, 2020, Funeng Oriental announced a CNY571-million investment project in Foshan to build a smart manufacturing high-tech industrial park. So Foshan’s risk paid dividends in the end.
- Bengbu and Tatfook Technology
Shenzhen Tatfook Technology Co., Ltd. was established in 2001. Headquartered in Baoan District, Shenzhen, it is a national high-tech enterprise integrating product R&D, production and sales. The company focuses on the main businesses of mobile communications, intelligent terminals and automobiles, and has established stable cooperation with such globally renowned companies as Huawei, Ericsson, CommScope, Apple, Bosch and so on.
When 5G-related public companies saw their stock price skyrocket in 2019, Tatfook failed to diversify its business unit, whereas its main business lost dynamics. The controlling shareholder promised guaranteed returns for investors to participate in the private placement of Tatfook, but reneged on its words and redeemed its exchangeable debt, which involved a considerable CNY5 billion. Consequently, Tatfook became heavily burdened by CNY9-billion debt, while its assets valued only CNY7.732 billion — it fell into a debt crisis.
One of its creditors, Bengbu Gaoxin Investment Group Co. Ltd., suggested a package of solutions to help Tatfook conduct debt restructuring, which was agreed in a timely fashion with Bengbu government.
At the end of 2018, Tatfook transferred all the shares of its wholly owned subsidiary Anhui Tatfook Heavy Industry Technology Co., Ltd. to Bengbu Gaoxin Investment at the price of CNY58 million. The subsidiary had assets of CNY1.127 billion, liabilities of CNY1.214 billion, owner’s equity of CNY87 million, and losses of CNY78 million in 2017 and CNY300 million as of September in 2018. Thus, it actually sold the company at a premium price.
- Shangrao city and Jinko Solar
In 2012, anti-dumping and anti-subsidy tariffs significantly hurt Chinese photovoltaic companies, and Jinko Solar was no exception. It slid into its worst situation historically, losing CNY1 billion in a single year, got stuck in a cash flow emergency and was deprived of banks’ previous lending. In short, it was in dire straits.
At a critical moment, the Shangrao government helped the enterprise issue CNY800 million corporate bonds to survive the difficulties. Later, when another province offered more attractive preferential policies to poach Jinko away from Shangrao, the enterprise stayed true to the Shangrao government. The government instantly took reparative action to have Jinko stay, and it succeeded. Unsurprisingly, Jinko started a CNY15-billion investment plan in Shangrao in 2020.
3. Backing unexpected rising star companies
- Changzhou city and China Lithium Battery Technology
In August 2015, China Lithium Battery Technology Co., Ltd. (CALB) was reported to have jointly invested CNY12.5 billion in a lithium-ion battery project with the local government of Jintan District, Changzhou City, Jiangsu Province. The invested project could support 6 million pure electric vehicles like BAIC EV200 per year if finished, marking the biggest investment in the lithium battery industry in China.
According to the cooperative investment agreement, Jintan government would set up an investment company to partner with CALB to establish the target company with registered capital of no more than CNY4 billion. Of that, CALB should contribute no less than 30%, and the rest was left to Changzhou government.
- Liuyang city and HKC
Headquartered in Shenzhen, HKC forayed into the LCD panel industry in 2017 and soon became something of a dark horse in the space. HKC started as a traditional consumer electronics manufacturer, but in recent years, it has upgraded into a high-tech group company integrating R&D, production and sales.
As one of the strongest comprehensive manufacturing enterprises in China’s IT space, HKC is the only private enterprise with an entire industrial chain in China’s display industry. Its products now include display screens, display machines, TV sets, electronic whiteboards, and digital out-of-home billboards, among others. Its market share in large-screen LCDs earns it a top-three position in China, and as a TV OEM, its production volume ranks fourth globally.
HKC currently has 4 panel production bases, among which the Changsha HKC base located in Liuyang city is the largest. The base is home to the 8.6th generation Ultra HD new display devices production line, which is expected to achieve over CNY15-billion in annual output value and pay taxes of more than CNY1.3 billion. Besides, it can attract over 20 upstream and downstream enterprises along the industries chain, which will then achieve an annual output value of CNY10 billion and pay taxes of CNY900 million at least.
Chinese data provider TianYanCha.com shows that Liuyang invested CNY14.6 billion in the Changsha HKC base, accounting for 66%, while the parent company HKC contributed CNY7.48 billion or 34%.
- Guangzhou city and BeiGene
Guangzhou state-owned company Get Tech once partnered with BeiGene (Hongkong), a wholly owned subsidiary of BeiGen, to set up a joint venture, BeiGene Biomedicine.
Of the CNY2.2 billion capital invested into BeiGene Biomedicine, BeiGene (Hongkong) committed CNY200 million, Get Tech committed CNY1 billion, and commercial banks lent another CNY1 billion.
Get Tech runs a government fiscal revenue-backed investment fund to perform direct equity investment. From Guangzhou government’s perspective, this kind of connection can give invested firms more confidence and reassurance to settle down in Guangzhou. Vice versa, these firms can bring high investment returns as well as industrial transformation for Guangzhou.
A Revolution in Government Investment
Whether investing in healthy, distressed, or hidden-gem companies, local governments in China are clearly taking note of Hefei’s lead to spur industrial development in their regions. By the practice, they not only attract high-potential companies, but they catalyze growth throughout the whole industry chain associated with those companies, spurring innovation and often receiving welcome rewards in the form of reinvestment into the local infrastructure. So it seems like a winning strategy!