China creates a new IT fund that will disadvantage foreign IT firms

1. Asia
China: Industrial policy
15 FEBRUARY 2017 17:02 EST
New IT fund will disadvantage foreign IT firms, distort markets
 The government recently established a massive investment fund targeting advanced technologies in
cybersecurity, telecommunications, and associated sectors.
 Officials will use the fund to boost domestic capability in next generation networks and technologies,
shore up cybersecurity in line with Beijing’s directives, and reduce dependence on foreign technology
 Foreign IT firms will be further disadvantaged as domestic competitors gain access to new debt and
equity financing and other financial services via the fund.
.
Beijing rollsout mechanism for cyber, telecom, and associated sectors
Authorities late last month quietly established the close to USD 15 billion China Internet Investment Fund
(CIIF) overseen by the Cyberspace Administration of China (CAC). It will be used to subsidize the build-out
of next generation telecommunications networks and technologies, and acquire foreign technology.
The government-sponsored fund is similar to the massive National Integrated Circuit (IC) Fund launched in
2014—now the target of much US government and industry concern over the potential for global IC market
distortion. This new fund will likely spur similar unease and cause President Donald Trump’s administration
to consider new ways to protect US industry against these vast pools of state-backed capital further
distorting markets through subsidizing Chinese tech firms and acquiring foreign ones.
Communist Party likely behind strong support for CIIF, ensuring traction
The ruling Communist Party has elevated the IT sector to the center of its national security priorities, and
heavy party backing is behind the establishment of this and other investment funds targeting technology
development. Support from major entities such as the Ministry of Finance and the National Development
and Reform Commission underscores the government’s alignment with party priorities. The lack of a
designated professional financial manager increases the potential for lack of oversight and corruption,
though it is likely that a trusted financial firm will eventually be given control of fund assets.
The new fund also features a strategic partnership agreement with major players in China’s
telecommunications and financial industries. These include top carriers China Mobile, China Unicom, and
China Telecom; also, financial behemoths such as the Industrial and Commercial Bank of China (ICBC)—
which calls itself the domestic financial industry “informatization leader,” meaning it will take the lead in large
investments in IT projects—plus CITIC Guoan and the China Postal Insurance Company.
The fact that so many industry behemoths are lining up to invest in the CIIF even without an announced
fund manager is another sign that the project has very high-level support and will become a big player in

2. China’s internet and cybersecurity sector. ICBC alone put CNY10 billion into the CIIF, its largest single
investment in a market-oriented fund project. This strongly suggests that the banking sector is also under
pressure from the party to further align with its priorities in the digital and tech space. Other major banks
have stepped up, offering loan linkage agreements for the CIIF that will provide bank credit and financial
services support totaling another USD 20 billion.
Through the banking partners, the fund will provide equity and debt financing and investment banking
services to domestic IT firms across a range of sectors, including cybersecurity, cloud computing, big data,
Internet of Things, and automation.
As part of President Xi Jinping’s strategy to foster better domestic IT capabilities, the fund will be used
initially to bolster promising domestic players, but is also likely to be used for foreign technology acquisition
in the same way the National IC Fund has been used both for helping domestic M&As and fueling overseas
acquisitions. The low-key rollout of the fund and the lack of details about its management suggest Beijing
seeks to prevent this effort from becoming as controversial as the National IC Fund.
Fund will support Xi’saim to turn China into a tech and cyber superpower
The timing of the fund’s announcement is tied to several key recent events and national strategies designed
to turn the country into a cyber superpower.
 The CIIF will invest in cybersecurity firms, leveraging provisions of the new cybersecurity law set to
take effect 1 June that will favor domestic players in government procurement.
 The fund will be directly tied to China’s Internet Plusstrategy, helping bring digital technology to
traditional industries, including manufacturing, finance, medical services, government, and agriculture.
 Lastly, CIIF funds will be used to support the recently issued Informatization Strategy for the 13th
Five-Year Plan period (2016–2020), a broad effort that includes a number of digital strategies tied to
specific sectors such as big data, automation, and the Internet of Things.
The fund will be heavily influenced by CAC priorities—currently cybersecurity and media control—and the
CAC will use the fund to increase its role in cybersecurity and telecommunications relative to other
bureaucratic heavyweights such as the Ministry of Industry and Informatization (MIIT) and the Ministry of
Public Security. An office under the party’s Cybersecurity and Informatization Leading Small Group, the
CAC lacks the bureaucratic heft and funding of ministries and sees the fund as a way to enhance its
influence in leading sectors where it already holds regulatory sway.
Foreign firmswill face toughercompetitive environment
As the CIIF begins to allocate loans over the next several months in support of Beijing’s cybersecurity
initiatives, foreign firms will be further disadvantaged as domestic competitors gain access to debt and
equity financing and other financial services via the fund (please see Eurasia Group notes: China: Foreign
firms should brace for sweeping change under new cyber-security standards and China: Authorities
tighten the screwson foreign IT suppliers).
Smaller foreign IT companies are likely to eventually become takeover targets of technology and financial
firms backed by the fund, but the CIIF may develop new vehicles and mechanisms for foreign technology
acquisition in attempting to avoid the types of scrutiny that deals under the semiconductor fund have
generated from US and EU regulators. As the fund managers develop a strategy, it is likely to cover a
number of leading-edge technology sectors that US authorities will be eager to protect.
State-backed money set to continue distorting markets, complicate investor calculus
Beijing has a record of establishing big funds to back domestic and strategic priorities. Collaboration is
ramping up between these funds, top Chinese and overseas financial institutions, and local governments,
which will amplify Chinese influence over key strategic technologies and market sectors.

3. Late last month, the Silk Road Fund, China Investment Corporation (CIC), Singapore’s Temasek Holdings,
and other investors, including one backed by the government of IT hub Shenzhen as well as a private
equity firm, established an innovation fund to target mobile internet, Internet of Things, artificial intelligence,
and other leading-edge technologies. China’s elites will continue to pour money into the IT sector through
these vehicles, in what they see as a sure bet with state backing and an extravaganza of profit to be made,
while assisting the growth of sectors Beijing has prioritized in national plans and strategies.
These new and more established funds will inevitably run afoul of growing US and EU regulatory efforts to
prevent market distortions, and the US response will depend on how each individual deal is structured, what
technologies are involved, and how closely the participants are tied to government-backed players and
capital pools. Italy, Germany, and France this week are calling on Brussels to allow EU governments to veto
Chinese high-tech acquisitions that are state-backed.
This situation will complicate the landscape for investors and other market actors attempting to judge which
deals are likely to go forward, and which could be struck down by the long arm of Washington or Brussels.
Paul Triolo
Practice Head, Geo-technology
202.903.0006
Triolo@eurasiagroup.net
MeredithSumpter
Director, Asia
+1 202.903.0019
sumpter@eurasiagroup.net
ChuchengFeng
Researcher
+1 202.552.5381
Feng@eurasiagroup.net