In spite of the Chinese venture capital market’s vast size, one of the country’s most successful investors, CEC Capital founding partner and chief executive Wang Ran, has raised concerns about a disturbing trend in the sector. Over the past several years, so-called market money has retreated and been replaced by government money, according to Wang’s speech. That dramatic change means local governments have become the most powerful players in the market.

Unlike normal investors concerned about financial returns, local governments have put priority on attracting investment inflows into their regions, Wang said. Making it even more complicated is local governments’ risk-averse policy, which is contrary to the purpose of venture capital.

Wang’s speech became controversial amid many local governments’ belief that their role in the venture capital market was both necessary and desirable. They argued that local-government funding is more suitable as “the capital of patience” focused on growing “new quality productive forces”, compared to short-sighted, profit-thirsty private investors.

As a result, local government-controlled “mother funds” have mushroomed across the country. The government of eastern Jiangsu province, for example, set up a 50-billion-yuan (US$6.9 billion) mother fund over the weekend, which will be used in various specialised funds for local development projects.

While there are instances of duplication, inefficiency and waste in government venture capital funds, their efforts to nurture the country’s “hard tech” boom cannot be ignored. Competition between local government funds is not necessarily a bad thing. A certain level of “overinvestment”, however, might be needed to flesh out the most promising domestic start-ups.

Still, the risks associated with the thinning ranks of private venture capital on the mainland cannot be overlooked. If local governments become the sole source of venture capital in China, this could mean a return to the kind of investments associated with planned economies. Ultimately, China needs to foster a vibrant market-based venture capital market to achieve its vision of greater innovation-driven technological and economic growth.