The headquarters of Chinese memory chip maker ChangXin Memory Technologies (CXMT) is more than 1,000 kilometers away from the country’s tech hubs in Beijing or Shenzhen. The sprawling campus, surrounded by walls with electrified fencing for security, sits in the eastern city of Hefei, which is poised to reap hefty rewards from its bet on the company.
CXMT began trading on Shanghai’s tech-focused Star Market on July 27 after raising more than USD 8.5 billion in its IPO. Its gains since opening day has lifted the value of the roughly 30% stake held by Hefei-owned companies and investment funds to several tens of billions of US dollars.
The results also cemented Hefei’s reputation as a savvy tech investor. The city’s investment in CXMT dates to the company’s founding in 2016. Hefei also invested in display maker BOE in 2008 and, in 2020, led a USD 1 billion wager on electric vehicle maker Nio when it was still bleeding cash.
Today, the “Hefei model” of municipalities and provinces becoming venture capitalists has swept across China. With the traditional approach of driving economic growth—debt-financed infrastructure and real estate development—under intense scrutiny from Beijing amid a property downturn, local government financing vehicles, known as LGFVs, are racing to fund startups producing everything from drones and rockets to humanoid robots. This is making them key providers of early-stage capital at a time when the US-China tech rivalry has strained foreign venture capital flows.
As local governments rush to back the next tech champion, they risk fueling what China calls “involution,” when intense competition leads to declining prices and diminishing returns. Nevertheless, “Beijing is praising the Hefei model,” said Edward Tse, CEO of consultancy Gao Feng Advisory.
“Beijing believes that this is a good way. That’s a strong enough motivation for local governments to at least replicate [the approach],” Tse said.
Using investment funds to lure tech companies and their supply chains into Hefei has transformed the city into an economic powerhouse. Its gross domestic product grew 6.8% in the first quarter, the fastest rate among cities with an annual GDP of over RMB 1 trillion (USD 147.5 billion), according to Chinese media.
When Nikkei Asia visited CXMT’s campus in July, rows of new buildings were being built next to the headquarters. Thousands of construction workers from across the country had gathered for the job, attracting street vendors selling food and clothes on the roadside. Liu Yun, the owner of a food stall, said she makes about RMB 2,000 (USD 295.1) a night selling meals for RMB 12 (USD 1.8) per dish. “It got really busy this year,” she said, pointing to the swarm of stalls around her.
Located near Hefei’s airport, CXMT’s base is surrounded by farmland. But residences and shopping malls were popping up in an area about 25 kilometers to the south. Apartment units under construction were being sold at double the prices of those in an existing complex nearby.
“The center of the city is shifting toward the western areas,” near CXMT as well as facilities of artificial intelligence company iFlytek and Nio, said Fang, a property sales agent who only gave his last name.
Many regions in China had long relied on infrastructure development to keep their economies growing. With constraints imposed by Beijing on the amount of debt they could take on their own books, local governments used state-owned LGFVs to fund the projects. But ballooning debt and a lack of revenue growth exposed the limits of this model.
In 2024, the finance ministry launched a three-year plan to clean up RMB 10 trillion (USD 1.5 trillion) in “hidden debt,” or off-balance sheet financing by local governments. The International Monetary Fund estimates the scale of LGFV debt to be far greater, reaching RMB 71.4 trillion (USD 10.5 trillion) in 2025.
It is against this backdrop that Hefei’s tech-focused investment strategy has gained traction.
Hefei’s stake in CXMT is mainly held by Hefei Industry Investment Holding, controlled by the municipal government’s state-owned assets supervision and administration commission. The company has 132 subsidiaries in fields including health care, education, transportation and movie theaters.
Fitch Ratings in June upgraded Hefei Industry’s credit rating, citing the municipal government’s growing control and oversight. Its “strategic investment portfolio is increasingly aligned with the city’s five-year plan and strengthening its strategic presence in the economy,” said associate director Ramona Chen. She expects that CXMT’s IPO “may benefit Hefei Industry’s financial profile in terms of valuation gain and profit from potential dividend income.”
Other Hefei-controlled entities own minority stakes in Nio, BOE, and chipmaker Nexchip. The city also set up a joint venture with EHang, a drone maker headquartered in the southern city of Guangzhou, aimed at launching the first commercial operations of passenger-carrying unmanned electric vertical takeoff and landing (VTOL) aircraft in the country.
“If you look at the industries Hefei focused on, it’s in line with the national development goals of Beijing,” said Gao Feng Advisory’s Tse.
China’s new five-year plan, which runs until 2030, outlines state capital as a crucial driver of the national pursuit of self-sufficiency in key technologies. It calls for improving policies “supporting long-term capital investment in early-stage, small-scale, long-term, and hard technologies.” The central government last year pledged RMB 100 billion (USD 14.8 billion) for three regional “guidance funds,” which aims to steer capital into 600 smaller funds targeting emerging industries.
One way or another, government money makes up a large slice of the country’s venture capital pie. State enterprises and government-managed investment funds accounted for 74% of money raised by venture capital and private equity funds in China in the first half of this year, according to an industry association.
The central city of Wuhan launched a new RMB 1 billion (USD 147.5 million) fund focused on AI, funded by the Hubei provincial government and a Wuhan-controlled investment group. In Changsha, a city south of Wuhan, a state-owned industrial park developer set up a RMB 5 billion (USD 737.7 million) “advanced manufacturing industry fund” targeting construction machinery and electrified vehicles.
“LGFVs with a proven track record and relevant experience are increasingly evolving into city investment platforms or asset management companies,” said Ricky Tsang, a director at S&P Global Ratings. “In this capacity, one of their goals is to support local economic development by attracting businesses and IPO candidates to establish operations in their cities and help raise tax revenue and create employment opportunities.”
Other local governments looking to copy the Hefei model face an uphill battle. One major challenge is identifying quality candidates, as hundreds of municipalities often target similar high-tech industries.
“The supply is greater than demand because there are only a limited number of companies that are worth investing in,” said a venture capitalist in China who spoke on the condition of anonymity. “It’s difficult for a company to move to your city. So you can only attract second-tier projects.”
Building industries like semiconductors, which involves a complex supply chain, can also extend far beyond the term of a local party leader. Hefei often supports portfolio companies for years after making an investment, such as by facilitating collaboration with experts from the Chinese Academy of Sciences for a nuclear fusion project, according to Fitch’s Chen.
“The key is whether companies and the government have the right people to evaluate the risk, and to make measured investment decisions,” said Davis Sun, senior director at Fitch. “Not every government has this asset.”
Uncertainty surrounding electric appliances maker Dreame is shaping up to be a cautionary tale for local officials chasing startups.
Affiliates of the Suzhou-headquartered company incubated dozens of new ventures, ranging from electric motorbikes to robots to pool cleaners. These ventures, in turn, raised money from investment funds managed by Dreame but backed by local governments across the country, from Xiamen in the south to Jiaxing in the east and Dazhou in the west, according to corporate database Tianyancha. Some of these projects were heavily marketed but had little track record of actual sales.
Then, in early June, Dreame’s CEO Yu Hao was barred from posting on social media platform Weibo, raising speculation that the company was under regulatory pressure.
Beijing has not publicly singled out Dreame. But on the same day as Yu’s Weibo ban, the State Council published “guiding opinions” on the private fund market. The document outlined strict registration procedures for local governments when they establish new investment funds.
“In principle, no new funds may be established at the county or district level,” according to the document. A spokesperson for China’s securities regulator said “some state-owned funds have deviated from their intended functional positioning.”
Following reports that some local governments have begun to scale back their support for Dreame-affiliated ventures, Yu told financial news outlet Caixin that the company will focus on four core areas. Dreame did not respond to a request for comment.
Sun said policymakers appear to be “targeting overcompetition between governments and reducing repetitive investments in the same sector.” The guidance also vows to crack down on misuse of government funds, such as “fake equity, real debt” structures that involve clauses requiring a startup to buy back an investor’s shares at a later date.
To mitigate risk, Tsang at S&P expects LGFVs to take minority stakes or co-invest with more senior-level city funds. Despite the turbulence, industry observers expect that state involvement in funding early-stage Chinese startups will continue to deepen.
The tech rivalry between China and the US means both Chinese startups and US venture capital funds face intense scrutiny from their respective local regulators. Dollar-based funds accounted for just 5% of overall fundraising activity in China in the first half of the year, according to the industry association.
In April, the National Development and Reform Commission blocked US tech giant Meta’s acquisition of Manus, an AI company founded in China but later relocated to Singapore, indicating that the practice of moving a company and its assets overseas to raise funds is now subject to national security reviews.
“Startups in strategic industries still need to continue to rely on funding from local governments,” said the Chinese venture capitalist. “There are a lot of startups in industries like space and nuclear energy, but foreign funds won’t be able to invest due to restrictions.”
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.
Note: RMB figures are converted to USD at rates of RMB 6.78 = USD 1 based on estimates as of July 27, 2026, unless otherwise stated. USD conversions are presented for ease of reference and may not fully match prevailing exchange rates.