[alephnerd]

> so funding them doesn't have the same issues with misaligned incentives

Not exactly.

China is federal, and funding comes from both local government and central government.

This can lead to local governments burning money on less successful ventures because of the close nexus between leadership and local politicians. China still has a severe problem with Access Corruption for this reason.

Also, at the Central Government level, ministries and SOEs will have their own funds and competing interests which leads to the occasional backstabbing

The collapse of Tsinghua Unigroup and much of the investments from Big Fund 1 are a good example. Big Fund 2 is only just closed recently, so it will take a couple years to judge the results of that batch.

After the 2015-16 market crash, China basically migrated towards a State Capitalism model with SOEs and Governments (local and central) acting as fund managers. This has pros in the sense that you can act quickly on political directives, but this has massive cons in that your incentives are aligned with keeping your direct managers who are political/party appointees happy.

Political Incentives (local or federal) might not always align with what's best for a product or company. EVs are a notable example of that, with private BYD and Tesla out-competing every other state funded EV and car manufacturer in China.

[sudosysgen]

> Not exactly.

The problem you are describing is fundamentally different from that in the US.

The problem in the US is that in many cases the money is literally just pocketed and returned to shareholders. The problem with funding of groups who are likely to fail due to connections is significant of course, but at least even in that failure mode money is spent on R&D and infrastructure, which at least has a chance of some success and even in failure will develop talent.

Tsinghua Unigroup is a good example. Yes it failed and defaulted, but from it's failure there is YMTC which is a huge strategic success and UNISOC which is a moderate success.

The issue you're describing is also present in the US, by the way, with local governments using tax rebates or direct incentives to lure corporations, and lobbying for subsidies to unsuccessful businesses due their locality/connections.

[alephnerd]

> with local governments using tax rebates or direct incentives to lure corporations

But local governments do not have a controlling stake and actual CapEx investments in those ventures in the US.

If Tsinghua Unigroup goes belly-up again or can't meet it's targets as part of the reorg, the Anhui Province is on the hook, as they have the controlling stake in it after the cleanup.

This is a risk that a lot of people on HN seem to ignore (I think because of the complexity of the Chinese federal system).

In most cases, it's provinces that are on the hook for these ventures, and if they fail, it's a significant chunk of cash that is lost. Unlike the Central Government, Local and Provincial Governments have weak financials because they traditionally couldn't raise bonds in the financial sector directly plus they have the added welfare and pension liabilities as part of the Deng-era financial reforms where welfare and pensions were devolved to Provincial and Local Governments.

> but from it's failure there is YMTC

Rewrite of history. YMTC was always a success as a BU, and that's why it was split off from Tsinghua Unigroup because the overall structure of Tsinghua Unigroup was inherently unstable and put Hubei's CapEx at risk as they gave the capital to Tsinghua Unigroup to create YMTC.

[sudosysgen]

> But local governments do not have a controlling stake and actual CapEx investments in those ventures in the US.

The impact is not very different as they grant billions in subsidies which they hope to recoup in tax revenues later. I don't see how this provides incentives that are significantly different except that there is no ownership, which is objectively a worse deal for the local government.

> If Tsinghua Unigroup goes belly-up again or can't meet it's targets as part of the reorg, the Anhui Province is on the hook, as they have the controlling stake in it after the cleanup.

Anhui Province will lose at most the ~5 billion it put into buying a stake of Unigroup. It will not be on hook for outstanding debts as far as I can tell, so I don't understand how this arrangement is any worse for Anhui than giving 5 billion in subsidies and tax credits as a US state would - for example Ohio provided an additional 2 billion in funding for the TSMC fab, NY around 10 billion, etc...

> Rewrite of history. YMTC was always a success as a BU, and that's why it was split off from Tsinghua Unigroup because the overall structure of Tsinghua Unigroup was inherently unstable and put Hubei's CapEx at risk as they gave the capital to Tsinghua Unigroup to create YMTC.

This doesn't change my point that the investment into Unigroup directly led to YMTC which is a massive success. I'm not saying that Unigroup is responsible for YMTC's success, I'm saying that investments into Unigroup - in this case including Hubei's investment - had good outcomes even if Unigroup as an entity failed.

[alephnerd]

> The impact is not very different as they grant billions in subsidies which they hope to recoup in tax revenues later

Yes, but it's not a CapEx investment (as in upfront capital taken out of a treasury and invested), and is subject to public notices so there at least is an auditable trail. And unlike China, municipalities and States in the US can directly raise capital via bonds.

> so I don't understand how this arrangement is any worse for Anhui than giving 5 billion in subsidies and tax credits as a US state would

Because that stake in one venture is 10% of Anhui Province's entire Revenue in 2022 - Anhui's total revenue was only $49B in 2022 but it's expenditures were $115B in 2022 [0]. And that's just one venture.

A provincial government like Anhui has invested in dozens (if not hundreds) of large scale ventures such as the legacy automaker JAC Group and Volkswagen China. While these amounts might not necessarily at the same amount as SMIC (excluding JAC Group and Volkswagen China), they are still fairly significant. And Anhui is a middle of the pack government in China - all provinces (as well as the local governments within provinces) themselves have actual CapEx on the line in ventures.

This is a significant risk, as local and provincial governments also have a duty and requirement to provide public services, and ventures not doing well can have an impact on the financial health of provincial and local governments, yet they still have the developmental indicators of Ecuador or Cuba. Spend those billions actually alleviating the urban-rural gap instead of acting as a wealth creation mechanism for much richer Beijing, Tianjin, and Shanghai, where most of Tsinghua Unigroup's CapEx is spent.

> This doesn't change my point that the investment into Unigroup directly led to YMTC which is a massive success

It does though. Even though YMTC was under the Tsinghua Unigroup umbrella, it's primary capital came from a separate government and remained autonomous of Tsinghua Unigroup, and Unigroup's larger failures impacted actual deliveries and roadmap items for YMTC [1]

[0] - https://data.stats.gov.cn/english/easyquery.htm?cn=E0103

[1] - https://asia.nikkei.com/Business/China-tech/China-s-Tsinghua...

[sudosysgen]

> Yes, but it's not a CapEx investment (as in upfront capital taken out of a treasury and invested), and is subject to public notices so there at least is an auditable trail. And unlike China, municipalities and States in the US can directly raise capital via bonds.

This is also true for Anhui. Out of the ~5 billion about 2.6 billion was in direct funding, the rest is in debt/equity swaps which aren't going to be upfront costs.

Similarly in the US, for this kind of project you can expect about half of the funding to be a direct grant and the other half to be deferred.

> Because that stake in one venture is 10% of Anhui Province's entire Revenue in 2022 - Anhui's total revenue was only $49B in 2022 but it's expenditures were $115B in 2022 [0]. And that's just one venture.

Ohio's situation is similar, with ~8% of yearly revenue spent on that one single TSMC building. Ohio's direct revenue is only around 25B/yr, with the vast majority of the budget being funded by the federal government (mostly pass through, for example Medicare)

> It does though. Even though YMTC was under the Tsinghua Unigroup umbrella, it's primary capital came from a separate government and remained autonomous of Tsinghua Unigroup, and Unigroup's larger failures impacted actual deliveries and roadmap items for YMTC [1]

Again, the argument from the start was about outcomes in funding for the industry. I have not argued anywhere that Unigroup's leadership deserves any credit, just that some of the funding allocated to Unigroup - chiefly the one earmarked for YMTC - ended up with decent outcomes.

[alephnerd]

> the rest is in debt/equity swaps which aren't going to be upfront costs

Those are still an upfront cost on Anhui's treasury as it is counted as a liability, and a liability with limited ability to service due to the relatively weak municipal and provincial bonds market due to the ongoing LGFV crisis.

> Ohio's situation is similar, with ~8% of yearly revenue spent on that one single TSMC [Intel, not TSMC - good catch selimthegrim] building. Ohio's direct revenue is only around 25B/yr, with the vast majority of the budget being funded by the federal government (mostly pass through, for example Medicare)

Ohio only gave $0.6B - ie. 2.4% [0] (and even that was controversial [1]). The rest of the $7.4B came from the CHIPS Act.

Furthermore Ohio has a AAA credit rating score [2] meaning it can borrow at low-to-no interest, which doesn't really exist as an option at scale in most Chinese provinces.

And finally, this investment by Ohio generated jobs within Ohio. The Tsinghua Unigroup bag-holding isn't allocating Capex for Anhui, as most of Tsinghua Unigroup's assets are not in Anhui.

That said, a capex-to-jobs case could be made for JAC Group and Volkswagen China which have Anhui government ownership stakes, but then again they themselves are losing marketshare to BYD - a privately funded company - like just about every other car manufacturer in China (the majority of whom are SOEs or have an ownership stake from Provinces or Central Ministries).

It's not so say American states haven't made similar mistakes before (eg. the NY Corruption indictments following the Buffalo Billions Scandal), but the fact that Buffalo Billions was news is itself a major deal - corruption and misallocation of capital within the BigFund and SOEs is sadly the norm in China, and everyday I can see CCDI arresting yet another person, while ignoring others until they piss off the wrong guy (and occasionally, even CCDI themselves are found to be corrupt).

> Again, the argument from the start was about outcomes in funding for the industry. I have not argued anywhere that Unigroup's leadership deserves any credit, just that some of the funding allocated to Unigroup - chiefly the one earmarked for YMTC - ended up with decent outcomes

And my argument is that this leads to a "to big to fail" situation which is extremely risky at the provincial and local level because of the lack of fiscal fallback options for local and provincial governments in China as well as the fact that all that capital could have been better spent by provinces to uplift their population's living standards instead of essentially acting as a wealth transfer to much richer coastal provinces or the 3 provincial level cities.

Tsinghua Unigroup is not a one-off example of this risk, plenty of similar crises and failures have happened in recently in China. And Anhui is not the only Chinese province faced with this situation - almost all are (except Guangdong, as usual).

Those tens of billions Anhui has spent not just on Tsinghua Unigroup in 2022, but the dozens of other similar ventures like JAC Group, Volkswagen China, etc could have been better spent on building it's human capital. For a government that should be the primary "decent outcome".

It's a middle-of-the-pack province in China with developmental indicators comparable to Ecuador, Cuba, and Peru and well behind Thailand's poorest region (Isaan). Think about how many more cars JAC could sell, how many more electric toilets RSD Group could sell, and how much more chicken 老乡鸡 could sell if Anhui's ytd median disposable income per capita was greater than $4,100 [3], and if Anhui's rural median disposable income per capita was greater than $2,500 [4].

You can argue purchasing power all you want but more of the high value goods that a company like Tsinghua Unigroup, JAC Group, etc are producing and intending to sell are at price points that are unaffordable at that level of disposable income.

By every standard it is a misallocation of capital, and sadly a very common one across China.

[0] - https://www.policymattersohio.org/files/assets/odod-intelons...

[1] - https://www.dispatch.com/story/news/2022/07/28/chips-act-fou...

[2] - https://en.wikipedia.org/wiki/List_of_U.S._states_by_credit_...

[3] - https://www.ceicdata.com/en/china/income-per-capita/disposab...

[4] - https://www.ceicdata.com/en/china/disposable-income-per-capi...