Policymakers in Washington and Beijing are vying to take the lead in a contested race to develop and diffuse frontier technologies. As the Trump team re-enters this competition after a four-year hiatus, its Chinese counterparts are struggling to foster the kinds of zero-to-one innovations the United States has a track record of producing.
To change this dynamic, China’s leaders believe that the country’s investors require more patience. Increasing the supply of patient capital is a key component in the CCP’s national campaign to promote indigenous scientific and technological innovation. Top leaders admitted as much in last year’s Third Plenum Decision when they called on venture capital to “invest in early [stage firms], invest in small [firms], invest long term, and invest in hard tech.”
China envisions a system of patient capital where investors are committed to supporting hard tech companies through the “valley of death” stage characterized by low revenues and high R&D costs. Investor patience will encourage firms to undertake the long-term high-risk, high-reward R&D often required to invent and commercialize technologies at the heart of “high-quality development.”
But the dramatic downturn in private venture capital activity – a key source of R&D funding for strategic industries – has jeopardized this vision. In response, Beijing is determined to mobilize state-backed actors as a reliable source of truly patient capital.
Enter government guidance funds (GGFs). Beijing hopes GGFs – also referred to as Industrial Guidance Funds or Government Investment Funds – can fill the role of patient capital that it sees as crucial to cultivating indigenous technological innovation in strategic sectors. Modeled after traditional venture capital, GGFs are established when state-backed entities allocate seed capital from their budgets to establish funds that make equity investments in capital-intensive projects with long time horizons in state-prioritized sectors such as semiconductors and other strategic industries.
These state investors attempt to “guide” other investors to co-invest in projects by supplying seed capital, delegating investment decisions to market-oriented fund managers, and foregoing returns above a specified amount. On paper, GGFs are an ideal source of patient capital for Beijing’s innovation ambitions. They tap into both market incentives to invest in competitive firms and political incentives to invest in state-designated strategic sectors.
While GGFs have not quite lived up to those expectations in practice, their deployment appears linked to central-level strategy. The number and size of guidance funds boomed post-2014, after the State Council encouraged local governments to create GGFs to support emerging industries and advanced manufacturing. In response, local officials started using GGFs to champion the industries identified in Beijing’s “Made in China 2025” initiative, including industrial robots, new energy vehicles, telecommunications, biotechnology, and semiconductors. By 2021, sectors featured in the Made in China 2025 plan accounted for approximately two-thirds of total GGF investments.
Beijing aims to develop GGFs into a reliable source of patient capital focused on helping China break technological bottlenecks in high-tech strategic industries – the same industries where both the Trump and Biden administrations have sought to restrict China’s progress through export controls and investment restrictions.
But it turns out that the political incentives facing state-backed GGFs are simply not conducive to patience. This is largely due to the decentralization of GGFs among subprovincial governments.
In practice, local governments’ incentive to use GGFs as an investment attraction tool for ready-to-build projects outweighs the incentive to heed Beijing’s call for patience. For example, many local governments have been using GGFs as tools for attracting local investment, turning market-oriented fund managers into de facto “external investment promotion offices” for local governments instead of drivers of new hard-tech commercialization.
To boot, local officials are incentivized to boost short-term performance indicators that are largely incompatible with advanced technology’s often slow progression. Officials managing GGFs are evaluated annually on whether they have preserved or increased the value of state assets. The kind of capital-intensive, early-stage projects Beijing wants GGFs to target could take a decade or more to show positive returns or, just as likely, go bust. This setup incentivizes local officials to intervene in GGF investment decisions in favor of more mature projects and firms with shorter return timelines, eroding any notion of patience.
While GGFs have become an indispensable source of capital for strategic industries, their current form remains far from the patient, market-oriented capital top leaders envision. Political considerations reinforce a preference for short-term returns, making it difficult for GGFs to operate as effective vehicles for high-risk, high-reward innovation.
Amid these challenges, the central government is intent on reforming the GGF model, striving to bridge the gap between ambition and implementation. The State Council dedicated its first document of 2025 to the topic of making GGFs more patient to better serve the industrial policy agenda. Beijing has also linked developing GGFs into patient capital with major policy initiatives like President Xi Jinping’s often-touted “New Quality Productive Forces.” Sustained high-level attention to GGFs can be read as both an admission of their shortcomings and a commitment to address those shortcomings through further reforms.
Ultimately, Beijing’s ambition to transform government guidance funds into true patient capital is constrained by the very system that necessitates their existence. Political incentives drive state capital to prioritize short-term gains over long-term breakthroughs. While China will remain a formidable competitor in scaling existing technologies, its structural barriers to fostering zero-to-one innovation persist.
That means the United States retains an important advantage when it comes to financing breakthrough innovations that demand patience and a high tolerance for risk.
As the Trump administration revisits China-U.S. tech competition, it should double down on the United States’ enduring strengths – namely, its deep private capital markets and risk-taking investment culture. In a race where patience is paramount, Washington should focus on fortifying the conditions that make the U.S. the world leader in frontier technologies.
