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A Whole New Level Of Moral Hazard: China Will Use Public Funds To Cover Venture Capital Losses

Tyler Durden's picture




 

It should surprise nobody that when it comes to perpetuating the global central bank "put", China - which is at daily danger of having its house of trillions in non-performing loan card collapse at any moment - has perfected moral hazard better than any western central banker. However, even the staunchest cynics will be stunned by the latest development out of the Shanghai government where starting next month, venture capital firms which invested in high-tech startups since the beginning of 2015 can apply for government compensation if their investment loses money.

In other words, while until now the government had bailed out corporate bond and bank loan investors, and was actively micromanaging the burst stock bubble (unsuccessfully), it will now enter the venture capital and private equity arena in what may be the grossest misallocation of capital unleashed by China to date.

The policy is laid out in a regulation dated December 29 that the city's Science and Technology Commission put on its website on January 21. Under the regulation, if the sale of a VC's stake in a startup fails to cover its original investment, it can ask the government for a payout amounting to 30 or 60 percent of the shortfall depending on the size and revenue of the firm it backed

The most any VC firm can receive in one year is 6 million yuan. The limit on individual investment projects is 3 million yuan although we are confident both these limitations will be breached grossly and repeatedly.

Shanghai is not the first Chinese city to implement this lunacy: an investor with a financial institution in Shanghai said the city did not invent the idea of subsidizing high-risk private financial investment. Other local governments in China have implemented similar rules but none of them offer quite as much compensation, he said.

With other local governments it was more of an ad hoc arrangement, he said. "You go to the government's public finance bureau, asking for money, and they will tell you to wait as they go over their budget. Usually they'll return and say there are no funds left, so you'll have to wait until the next year and see."

According to Caixin, the payout offer is intended to encourage private VC investment to support innovation and the development of Shanghai as a global high-tech center, the document says. The policy is to last for two years. 

Of course, what it will encourage instead is another round of massive fraud, and investing in idiotic projects that have zero hope of recovery let alone return, because when one is spending with a full government backstop - like during episodes of QE - the last thing one cares about is trivial concepts like "risk." There is only the guarantee of return and as Allan Meltzer put it best, "Capitalism without failure is like religion without sin. It doesn't work."

What it does do is assure that an even greater bust will take place once this particular bubble bursts, however in the process billions in taxpayer funds will be "allocated" to a handful of individuals who will promptly abuse China's capital controls and end up purchasing luxury apartments in Manhattan.

Surprisingly, instead of keeping their mouth shut and just accepting the government's risk-free money, some have dared to speak out against this idea which can only be classified as sheer idiocy:

The idea will have a "disastrous" impact on the principles of the capital market, said Andrew Y. Yan, managing partner of private equity investment firm SAIF Partners.

 

"A fundamental principle of the market economy is the match between risk and return," he said. "VC investments are extremely risky and limited to only a very few people and institutions. The negative consequences of using public money to compensate investment losses will be unimaginable."

 

Xie Zuoqiang, vice president of the PE firm Prosperity Investment, said the new policy provides no clear standards and procedures on calculating losses, leaving loopholes that can be abused to cheat tax payers' money. He also said the two-year life of the regulation creates uncertainties because VC investments often last longer than that. "The policy may be well-intentioned," he said, "but supporting an industry is a long-term initiative."

Actually the policy is beyond idiotic, however it is clearly designed to enrich a handful of "venture capitalists" who like U.S. bankers have purchased local government puppets to do their bidding for them.

That said, there may be a silver lining: very soon the infamous "zero-corn" Theranos may liquidate in the US only to be reconsistuted in Shanghai, where its fraud will guarantee massive taxpayer funds are spent to boost the bank accounts of every criminal involved.

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Wed, 01/27/2016 - 20:24 | 7105960 OrangeJews
OrangeJews's picture

Oh yeah...  that sounds like a great idea!

Wed, 01/27/2016 - 20:26 | 7105968 Soul Glow
Soul Glow's picture

That's the same as TARP, TARP II, QE, QE Lite, QE 2, Operation Twist, QE 3....China is just trying to be like US!  They look up to us.  We should be so proud of our little Keynesian/Socialist little brother.

Wed, 01/27/2016 - 20:32 | 7106000 Duc888
Duc888's picture

 

 

Soul Glow.... you nailed it.  Same shit.  Funny thing is all we got to do to stop this bullshit is to tell them to go fuck off.

 

Wed, 01/27/2016 - 20:34 | 7106018 besnook
besnook's picture

i think you are mistaking who is telling who to fuck off.

Wed, 01/27/2016 - 20:35 | 7106024 ToSoft4Truth
ToSoft4Truth's picture

Flight 370?

Wed, 01/27/2016 - 20:38 | 7106045 Boris Alatovkrap
Boris Alatovkrap's picture

In Amerika is call "Renewable Tax Credit", no?

Wed, 01/27/2016 - 20:39 | 7106052 Soul Glow
Soul Glow's picture

It's called Reno, Nevada.

Wed, 01/27/2016 - 20:40 | 7106059 Boris Alatovkrap
Boris Alatovkrap's picture

Reno is armpit of Amerika?

Wed, 01/27/2016 - 20:45 | 7106082 Soul Glow
Soul Glow's picture

No taxes in the armpit!

Wed, 01/27/2016 - 20:50 | 7106113 Durrmockracy
Durrmockracy's picture

So in other words, if you are in China sell and GTFO now while you still can??

Wed, 01/27/2016 - 21:03 | 7106179 knukles
knukles's picture

This just in.... Goldman announces moving all trading to Beijing

Wed, 01/27/2016 - 21:47 | 7106361 NoDebt
NoDebt's picture

So let's say I start a VC company with my own money (just to keep this simple).  I invest in a high tech startup company that I also own.  

I take my own money from my VC company, shift it to my 'high tech startup' as an "investment" and then close the doors on the startup- sorry, didn't work out, total loss.  Then I apply for a 60% refund from the government because my VC company "lost" its entire investment.

I've now made 60% profit for doing nothing but shifting money from my left pocket to my right pocket.

Wed, 01/27/2016 - 22:55 | 7106689 besnook
besnook's picture

the chinese will decide that is corruption and benefit the hemp industry with some tied around your neck.

Wed, 01/27/2016 - 21:00 | 7106164 commishbob
commishbob's picture

Boris has obviously never been to Detroit.

Wed, 01/27/2016 - 20:38 | 7106051 Soul Glow
Soul Glow's picture

Japan opens down 1%.  I guess they need moar arrows.

Wed, 01/27/2016 - 20:57 | 7106145 max2205
max2205's picture

U can't make this up

 

Wed, 01/27/2016 - 21:00 | 7106161 Cognitive Dissonance
Cognitive Dissonance's picture

China seems to be doing precisely that...on a daily basis no less.

Thu, 01/28/2016 - 02:00 | 7107201 GotGalt
GotGalt's picture

Japan needs to learn...don't bring arrows to a gun fight!

Wed, 01/27/2016 - 20:38 | 7106044 Rabbi Chaim Cohen
Rabbi Chaim Cohen's picture

Only in China would they publicly advertise a guaranteed pay-out for kamakaze speculators.

Wed, 01/27/2016 - 20:40 | 7106056 Boris Alatovkrap
Boris Alatovkrap's picture

Only in Amerika would former Goldman Sack CEO cum Secretary Treasury tell citizenry must pay Bank and CDS insurer that $747B is immediate necessary to save nation.

Wed, 01/27/2016 - 20:48 | 7106098 ToSoft4Truth
ToSoft4Truth's picture

'Teetering here, teetering there...'

 

"I've abandoned free market principles to save the free market system" - George W. Bush

https://www.youtube.com/watch?v=Tmi8cJG0BJo

Thu, 01/28/2016 - 05:08 | 7107407 R.R.Raskolnikov
R.R.Raskolnikov's picture

I woke up and checked my computer (I live in nort-west Europe). I read ZH and saw this. I thought: this is ridiculous. I must be sleeping.

Wed, 01/27/2016 - 20:27 | 7105969 remain calm
remain calm's picture

Put everything on red.

Wed, 01/27/2016 - 20:31 | 7105996 Soul Glow
Soul Glow's picture

It's called "Moral hazard" which Keynesian economics says it addresses, in theory anyway, but never does.

Wed, 01/27/2016 - 21:05 | 7106195 knukles
knukles's picture

The "Moral" hazard of the story is the Peasantry get fucked again!

Wed, 01/27/2016 - 20:29 | 7105982 besnook
besnook's picture

lol. the power od owning your own fiat. the west got sucked into private ownership of their money and are getting fucked daily because of it. china just prints with no consequences except worn out printing presses because their money does not have to be debt, just a journal entry to balance a math model.

Wed, 01/27/2016 - 20:29 | 7105983 dochood
dochood's picture

Privatize the profits, SOCIALIZE the losses.

Wed, 01/27/2016 - 20:32 | 7105998 Soul Glow
Soul Glow's picture

Moral hazard.

Wed, 01/27/2016 - 20:35 | 7106020 Bangin7GramRocks
Bangin7GramRocks's picture

And the beat goes on.....please Zero Hedge. Refrain from the "end of days" articles for a few weeks. Haven't you Tyler's learned your lesson yet?

Wed, 01/27/2016 - 20:40 | 7106058 Soul Glow
Soul Glow's picture

Stock market is in bear territory and you want less doom porn?  

Try Bloomberg then.

Wed, 01/27/2016 - 21:06 | 7106198 knukles
knukles's picture

Root for the Bread Lines!

Thu, 01/28/2016 - 16:59 | 7110346 MSimon
MSimon's picture

Root for the Bread Lines!

 

Fucked. Or rooted. As the case may be.

Wed, 01/27/2016 - 20:30 | 7105987 Jstanley011
Jstanley011's picture

It's not such a bad thing if you pronounce it so it sounds French. Like this: "Moral Hah-ZARD." See how it sounds all sophisticated and shit?

Wed, 01/27/2016 - 20:32 | 7106002 Soul Glow
Soul Glow's picture

+1

Wed, 01/27/2016 - 20:30 | 7105988 BlueStreet
BlueStreet's picture

That's gonna make the farmers who lost their life savings ecstatic. 

Wed, 01/27/2016 - 20:31 | 7105989 Duc888
Duc888's picture

 

 

Same as the FED. 

QE

publik fundz= slave wage taxpayer monies.

Pulllllllllllllllllllllllmmmmmmmyyyyyyyyyyyyfffffiiiiinnnnnggggeeeeerrrrrrrrrrrrrrrr   muthafukkerz.

Remind me again who works for who?

 

LOL.

 

Wed, 01/27/2016 - 21:17 | 7106245 nmewn
nmewn's picture

I'm seeing a definite pattern here.

Wed, 01/27/2016 - 20:31 | 7105993 ClausClayperon
ClausClayperon's picture

loss.of.words.

Wed, 01/27/2016 - 20:32 | 7105999 Lost in translation
Lost in translation's picture

Man, the good news just keeps on comin'...

Wed, 01/27/2016 - 20:34 | 7106016 Soul Glow
Soul Glow's picture

We printed some folks.

Wed, 01/27/2016 - 20:32 | 7106005 ToSoft4Truth
ToSoft4Truth's picture

Shanghaied!

 

Can we be sure the FANGs aren't GSEs??  It's CIA! 

Wed, 01/27/2016 - 20:33 | 7106006 khnum
khnum's picture

Where I grew up people who rang the bell and shouted the bar usually woke up drugged and penniless in a back alley

Wed, 01/27/2016 - 20:51 | 7106118 r3ct1f13r
r3ct1f13r's picture

Yeah me to!! Usually it was the cook.

Wed, 01/27/2016 - 20:35 | 7106027 Panic Mode
Panic Mode's picture

Risk free investment scheme for the 0.1% 

Wed, 01/27/2016 - 20:37 | 7106040 Truth Eater
Truth Eater's picture

More evidence that the controllers of China are kwuewess.

Wed, 01/27/2016 - 20:43 | 7106057 ThroxxOfVron
ThroxxOfVron's picture

Corrupt party hacks and their princelings being bailed out.

 

"You don't have to steal the payroll and run off to US now, we fixed everything for you...

Wed, 01/27/2016 - 20:41 | 7106064 nakki
nakki's picture

All hail the PetroYuan

Wed, 01/27/2016 - 20:46 | 7106089 Soul Glow
Soul Glow's picture

Something like that, but after stocks crash 50% in March they will need to get off the fiat currency standard and back currency to gold.

Wed, 01/27/2016 - 20:52 | 7106121 nakki
nakki's picture

Or print 50 trillion more Yuan

Wed, 01/27/2016 - 20:45 | 7106083 Budnacho
Budnacho's picture

160 million lose thier jobs in steel industry....economy slowly deflating.....yeah...this should be a real plus for the social structure over there...

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