(Yicai) July 31 -- China is considering stricter regulations to improve oversight of its market of nearly CNY10 trillion (USD1.4 trillion) investment funds sponsored by local governments by proposing a negative list to prevent misguided investments.

The National Development and Reform Commission, China’s top macroeconomic planner, released two draft regulatory documents yesterday, aiming to reduce poor investment decisions and enhance returns. The NDRC is seeking public feedback by Aug. 28. 

One draft outlines guidance on investment direction, while the other sets out management and evaluation standards for fund operators.

Government investment funds are financed either entirely by local governments or jointly with private capital. These funds typically adopt market-based approaches, such as equity investments, to attract private sector participation while promoting targeted industries and fostering innovation and entrepreneurship.

As of last December, China had nearly 2,180 government-guided funds, with a target size of about CNY12.84 trillion (USD1.79 trillion) and a subscribed capital of around CNY7.70 trillion (USD1 trillion), according to data from venture capital research firm Zero2IPO Research. 

The proposed negative list would prohibit funds from investing in restricted sectors and those slated for phaseout, such as highly polluting chemical plants and small, inefficient mines.

When targeting emerging industries, the rules would caution against trend-driven investments to avoid poor decision-making. A single government agency would also be barred from setting up multiple funds for the same industry or sector.

Local governments would not be allowed to use these funds solely to attract outside investment or take actions inconsistent with the goal of building a unified national market.

Funds established by regional authorities would also be prohibited from making investments that could indirectly increase hidden government debt. Additionally, they would be banned from investing in the stock, futures, or derivatives markets, and from engaging in illegal guarantees or investments that could result in unlimited liability.

Editors: Tang Shihua, Emmi Laine