(Yicai Global) Oct. 18 -- China's finance ministry is to consider tightening control over local government investment funds, which have been used to help underpin regional economic growth.

The cabinet has issued a document saying that the ministry will reclaim authorization for setting up such funds, the ministry said on its website in response to proposals from the Chinese People's Political Consultative Conference. It requires that finance departments at all levels take into account policy objectives, overall capital demand, financial affordability and other factors, as well as strictly limit their number and eliminate some already established.

According to the previous CPPCC proposal, local government investment funds have grown rapidly since 2000, while their large social capital participation in industrial investment, with a small amount of financial funds, has played an important role in optimizing industrial structure and promoting industrial transformation and upgrade.

But a disconnect between the policy objectives of these funds and the demands of marketization is becoming increasingly obvious. Some funds face clear problems such as a limited participation of private capital, a low degree of marketization and an inadequate performance evaluation mechanism. These urgently need solutions.

China set up just six government investment funds between 2002 and 2006, worth CNY3.5 billion (USD495.1 million), International Financial News reported, citing data from consultancy Zero2IPO Group. That reached a record high at the end of last year as the numbers soared to 2,065 and CNY12.3 trillion (USD1.7 trillion).

At the same time, the number of new funds opened each year has declined, with 572 new ones set up in 2016, the highest for any calendar 12 months. That trailed off to 284 in 2017 and 246 last year.

Shenzhen Fund Closures

In fact, local governments have also cut the number of such funds. Twenty-five subsidiary funds were liquidated and the scale of 12 sub-funds was downsized, with government guide funds worth over CNY14 billion recovered, according to a notice from Shenzhen's municipal investment guide funds and Shenzhen Capital Group published on their official website a month ago.

Sorting out unit funds is the daily work of Shenzhen's government guide funds, Shenzhen Capital Group said afterwards, adding that the recovery of the CNY14 billion in commitments by the city government fund was a kind of elimination targeting sub-funds that failed to fulfill the investment agreement upon expiration. This was also the first time that the Shenzhen guide fund had made public details about the cleanup of sub-funds.

The Shenzhen guide fund's previous cleanup and the finance ministry's statement this time both send a signal that securing money is getting harder, China Fund newspaper quoted a venture capital industry insider as saying.

"The actual leading institutions are not short of money, and the government guide funds are more oriented to those positioned in the sector's middle and upper reaches," the insider noted. "Raising the threshold will result in another survival of the fittest competition."

"The division of 20 percent against 80 percent will become more obvious within the sector in the long term," he added.

The ministry's statement has not been turned into policy or law and regulations so far, industry watchers said. Whether the regulators will issue relevant policies or not depends on the future situation and their likely impact on the industry is hard to tell before detailed policies and regulations are issued.