China’s state-led financialization for tech supremacy

The financialization of Western economies has unfolded as a prolonged systemic failure. What began as a mechanism to support productive enterprise has evolved into a structural dominance of finance over the real economy. Through deregulation, the proliferation of speculative activity, and successive asset bubbles, the sector has prioritized short-term gains over long-term investment. The 2008 financial crisis underscored these dynamics, transferring the burdens of systemic risk to the broader public while financial institutions were largely shielded from the consequences. This trajectory has entrenched income inequality and contributed to the political capture of regulatory institutions, inhibiting meaningful reform.

In contrast, China presents a divergent model. Its state-led financialization exemplifies a proactive deployment of financial mechanisms in service of national industrial objectives. Unlike the market-driven financialization typical of advanced Western economies, China’s approach is characterized by strategic state intervention and institutional design. The government not only participates in markets but reconfigures them—mobilizing state-owned enterprises as venture capital vehicles, directing bank lending toward emerging technologies, and leveraging local government financing platforms to support innovation. This model represents a deliberate recalibration of financial systems to prioritize long-term technological development over immediate capital returns.

State-owned enterprises (SOEs): from asset managers to venture capitalists

Chinese SOEs have increasingly transitioned from passive asset holders to active financial agents, functioning as quasi–venture capital entities with a targeted focus on high-technology sectors such as artificial intelligence, semiconductors, and advanced manufacturing. This transformation is rooted in the 2013 reforms under Xi Jinping, which marked a shift in state asset governance from a model of “managing assets” to one of “managing capital.” Central to this new framework are state-owned capital investment and operation companies (SCIOCs)—market-oriented entities tasked with allocating state capital in alignment with national strategic objectives.

Prominent SCIOCs such as Guoxin and Chengtong exemplify this model, channeling investments into key technological domains while retaining mechanisms of state oversight. Notably, their investment strategies increasingly resemble those of global institutional investors like BlackRock, characterized by portfolio diversification and minority equity stakes across a wide range of publicly listed firms. Over time, both Guoxin and Chengtong have reduced the size of their individual holdings while broadening the scope of their portfolios, mirroring BlackRock’s index-based approach. However, unlike BlackRock, whose investment logic is primarily driven by market signals and shareholder value maximization, these Chinese entities operate within a state-directed paradigm. Their capital allocation decisions are subordinated to broader industrial policy objectives, underscoring a distinctive model of “state-capital hybridization” wherein global financial practices are repurposed to advance national technological priorities.

Banks: from conservative lenders to investment partners

China’s banking sector has undergone a significant transformation from a traditionally conservative, loan-centric model—once governed by the “separation principle” that delineated clear boundaries between lending and investment—toward a more integrated, market-oriented system. Since 2015, mechanisms such as “investment and loan linkage” have enabled commercial banks to engage in equity-related activities, particularly in support of high-technology enterprises. Institutions like the Bank of China have introduced “green channel” loans that prioritize lending to startups with venture capital backing, and in some cases have experimented with convertible instruments such as “stock option models,” allowing for the conversion of debt into equity.

This evolution has been further institutionalized through the establishment of bank wealth management companies (BWMCs), which are permitted to make direct equity investments in high-tech firms. As of the end of 2022, the China Banking and Insurance Regulatory Commission (CBIRC) had approved 29 such entities. One notable example is BOCOM International, affiliated with the Bank of Communications, which manages the BOCOM Science and Technology Innovation Fund—an investment vehicle explicitly oriented toward advancing technological innovation. These developments underscore a broader trend of financial re-engineering within the Chinese banking system, as state-affiliated financial institutions adopt quasi-investor roles to support national strategic priorities, reinforcing the architecture of state-led financialization.

Local governments: trading land speculation for innovation funding

In recent years, Chinese local governments have transitioned away from reliance on Local Government Financing Vehicles (LGFVs), traditionally used to support land-based urban development, toward the deployment of Government Guidance Funds (GGFs). This strategic reorientation marks a shift from speculative real estate-driven financing to a model of purposeful financialization aimed at fostering technological innovation. Rather than leveraging land assets to finance urban expansion, local authorities are increasingly channeling capital into science and technology sectors through state-backed investment vehicles.

A prominent example is the National Integrated Circuit Industry Investment Fund (NICIIF), with a targeted fund size of approximately USD 95.8 billion, which supports enterprises in strategically vital sectors such as semiconductors. These funds operate not merely as instruments of capital allocation but as policy tools through which local governments execute central industrial strategies. According to the Zero2IPO database, as of 2023, there were 2,086 active GGFs across China, collectively managing assets exceeding USD 1.8 trillion. This proliferation underscores a broader recalibration of subnational fiscal behavior, whereby the objectives of economic development and industrial policy are fused within a state-directed financial architecture oriented toward national technological advancement.

A coordinated push for tech supremacy

This evolving model of state-led financialization reflects a deliberate integration of financial instruments with industrial policy, positioning the state as what we termed as “financial entrepreneur.” In this capacity, the state assumes a dual function: both as a strategic investor in capital markets and as a fund manager whose objectives are shaped through a hybrid of administrative directive and market logic. The recalibration of incentives across state institutions—ranging from banks and SOEs to local governments—facilitates the targeted allocation of financial resources toward sectors deemed essential for national technological leadership.

This coordinated mobilization contrasts sharply with earlier phases of development finance in China, which were heavily reliant on infrastructure-led investment through Local Government Financing Vehicles (LGFVs). The current financial architecture instead orients capital toward innovation and industrial upgrading. As illustrated in the accompanying figure, this shift embodies a paradigmatic change in the underlying logic of state intervention. The empirical results are notable: according to a 2023 report by the Australian Strategic Policy Institute (ASPI), China now leads globally in 37 out of 44 critical technologies, including advanced batteries, quantum sensing, and 5G communications.

A growing network of state agencies in innovation finance ecosystem is to ensure ideological alignment and managerial oversight, forming a core feature of China’s model of state-led financialization. This system also serves as a reminder of the original rationale behind China’s economic reform process where the boundaries between public and private sectors, and between liberal market coordination and socialist planning, become increasingly blurred. Notwithstanding its strategic coherence, China’s model of state-led financialization faces a series of structural and operational challenges. One key risk lies in the emergence of overcapacity within state-targeted sectors such as photovoltaics and electric vehicles. In the absence of commensurate demand, excessive production may generate inefficiencies, underutilized assets, and financial losses. Furthermore, the expansive use of mechanisms like GGFs has the potential to inflate asset bubbles, as state-directed capital may push valuations beyond sustainable levels, raising concerns over long-term financial stability.

The persistence of so-called “zombie firms”—enterprises maintained through state support despite chronic unprofitability—also continues to divert capital from more productive uses, undermining allocative efficiency. Tensions emerge from the dual imperative to stimulate market-based innovation while retaining centralized Party and state control over capital flows. These competing logics often complicate investment decisions and diminish the responsiveness of the financial system. Additionally, fragmented coordination across state entities and growing international scrutiny or resistance to China’s state-capitalist practices further limit the replicability and effectiveness of this model.

For Western economies, the implications are profound. Initiatives such as the U.S. Stargate Project—reportedly valued at $500 billion over four years to support AI and semiconductor infrastructure—and the European Commission’s InvestAI scheme, backed by €20 billion in guarantees, signal a renewed policy interest in public–private coordination. However, these efforts remain constrained by political fragmentation and a reliance on market-led frameworks. China’s approach is characterized by a level of centralized state capacity and institutional discipline that would be difficult to replicate without foundational political transformation in the West.

Should China succeed in sustaining this model without triggering systemic instability, the result would extend beyond technological leadership. It would represent a paradigmatic shift in the global political economy—one that challenges prevailing liberal capitalist orthodoxy and compels a fundamental reconsideration of the relationship between the state, capital, and innovation. In this sense, China is not merely competing within existing rules but reshaping the terrain on which economic competition is conducted.

^{Featured image by Michael Held via Unsplash.}