Chinese guidance funds involve subsidies to industry through equity investments; unlike direct subsidies, they incorporate some market involvement. Guidance funds also demonstrate China's ambitions to surpass the United States in advanced technology.

[Chinese government] guidance funds have a mandate to focus on strategic technologies rather than simply generating returns. . . . By con­trast, funding patterns in Silicon Valley have trended toward favoring consumer-facing companies with less innovative technology but a short­er timeline to profitability.

—U.S.-China Economic and Security Review Commission1

What is the purpose of finance and its relationship with the real economy? How can the financial sector better support innovation and national growth? What financing tools can lead to improved national competitiveness? What role should the state play, if any, in guiding capital?

These questions are not debated in the United States, at least not generally. The first question is not debated in China, either, because the answer is settled: finance should support the real economy. But China is vigorously grappling with the other points of political economy and is developing new theories and institutions—and its government is experi­menting with many new financing mechanisms—to support many different industrial policies. These new policy instruments combine state capital with market mechanisms. Such experiments offer insights into how the United States might fix its own market failures plaguing the fin­ancing of advanced hardware industries and the lack of patient capital in America.2

The largest of these new Chinese financing vehicles, as measured by assets under management (AUM), are government guidance funds, sometimes called industrial guidance funds. These are state-sponsored, public-private venture capital (VC) funds with a dual mandate of supporting industrial policy goals while providing investment returns. They aim to bring market competition to state owned enterprises (SOEs) while simultaneously channeling government funding to private firms. Their scale is enormous, with a fundraising target of up to $1.6 trillion.

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