A Chinese start-up’s dilemma exposes cracks in Beijing’s tech funding
HANGZHOU, CHINA – JUNE 02: Thongloun Sisoulith, General Secretary of the Lao People’s Revolutionary Party Central Committee and Chairman of Lao, watches the DR02 humanoid robot performance at Deep Robotics in Hangzhou, Zhejiang Province, China, on June 2, 2026.
Wang Gang | China News Service | Getty Images
Capital flows into China’s tech start-up world accelerated this month.
A few hours apart last Friday, the Chinese city government ordered companies to: disclosing financial ties robot vacuum cleaner manufacturer Dreame Technology and the State Council of China published comprehensive rules tighten control 23 trillion yuan of the country ($3.4 trillion) private fund industry.
The succession of events has underlined Beijing’s difficult balancing act as it seeks to rival the US’s technological dominance. As the government pours money into supporting China’s technology ambitions, guardrails and market forces are not always in place to prevent widespread misallocation.
Dan Wang, Eurasia Group’s China director, said Beijing is reining in the co-investment model that local authorities have adopted in recent years to attract businesses to their territories.
Local governments often “race to outdo each other” for strategic sectors, causing significant fiscal waste and increasing credit risks for the central government, Wang said.
Chinese local governments have sought to pivot from land financing, which has essentially collapsed since the housing crisis of the early 2020s, to equity financing, using state capital and government guidance funds to buy shares in start-ups and use capital gains as a new source of fiscal revenue.
Wall Street-linked US funds that once invested in China have also largely pulled back in recent years due to geopolitical risk, leaving a void to be filled by local Chinese yuan-denominated funds.
Wang added that local officials fail to evaluate projects like professional investors and tend to go all-in on one or a handful of hopefuls, leaving public finances exposed when bets go bad.
What happened
Dreame became the world’s largest robotic vacuum cleaner manufacturer in terms of sales in the first quarter. According to research consultancy IDCWith a rapidly growing structure in Europe and the US, the startup’s ambitions extend far beyond floor cleaning.
Reflecting the aggressive growth of some Chinese start-ups, Founded in 2017Dreame was born nearly a thousand connected Businesses that include electric vehicles, smartphones, humanoid robots, bubble tea and satellite networks. Founder Yu Hao claimed in January that he was building an ecosystem that “will become the largest ecosystem in the world.” The first $100 trillion company in human history.”
This spread has come under scrutiny in recent weeks. A city government in Jiangsu province, one of China’s largest electronics manufacturing hubs, has asked local companies to monitor their exposure to Dreame-linked entities, including investment sizes, financial expenditures and business operations. According to state-sponsored media.
Yu’s social media account on Weibo was also suspended, preventing the outspoken founder from making viral comments. state-linked media.
The Chinese provincial council, the Changzhou municipal government and Dreame did not respond to CNBC’s request for comment.
Much of Dreame’s expansion has been driven by government money. Sky Factory Venture Capital Fund Manages 41.6 billion yuan in assetsRoughly according to state-sponsored media 80 percent comes from local governments Industry funds in Suzhou, Xiamen and other cities. Almost all of its 29 funds reportedly It includes local state-owned capital and spans more than 10 cities.
Reflecting the spread of financing layers, China’s asset management association also this month called for further clarification When a fund invests more than 90% of its assets in a single fund.
‘Patient capital’
The structure reflects how China finances its industrial strategy.
Tilly Zhang, an industrial policy analyst at Gavekal Dragonomics, said local authorities are encouraged to distribute guidance funds as “patient capital”, supporting startups in long-horizon, uncertain technology fields and giving them time to grow, but inevitably inviting companies to pursue financing by preparing themselves for government priorities.
While the US supports tech companies indirectly through acquisitions, grants, and tax breaks, Chinese governments take direct equity stakes at all levels; It puts public money on the hook due to valuation risk, exit risk and governance exposure.
This also increases pressure on companies to deliver, even on risky ventures – and much of the capital comes from state-linked funds drawn to the technology because it is politically expedient, not because they have the know-how or investment experience.
Local governments are often “not professional enough to distinguish the trustworthy from the opportunistic ones,” Zhang said, pointing to a case in 2021 in Wuhan where a loss-making semiconductor project cost the government nearly 15 billion yuan.
Research by Rhodium Group found that local Chinese governments have created thousands of such funds over the past decade, and they are mostly fund-generating. Duplicate investments and wasted capital. By the end of 2025, China will 2,100 government guidance funds According to official figures, its target capital is over 11 trillion yuan.
“In Singapore, we have Temasek. In China, every level of government has their own Temasek,” said Bob Chen, a Shanghai-based renminbi-denominated fund investor, referring to Singapore’s sovereign wealth fund.
The Council of State’s new directive targets this model and says “Strict control over the establishment of new government investment funds“and prohibits counties and territories from creating new funds without approval from higher levels of government.
Chen said the rules move oversight upward to the city and state level.
‘Spray and pray’ approach
The state equity investment model, for all its flaws, has delivered gains and fueled the meteoric rise of some of China’s tech champions. Hefei province’s early stakes in electric vehicle maker Nio and chip maker CXMT have made the city a poster child for government venture investment.
We describe China’s innovation drive as ‘massive in scale but low in productivity’; a ‘spray and pray’ approach that produces tremendous output but has a high failure rate.
Yuen Yuen Ang
Alfred Chandler Professor of Political Economy
Small cities that missed out on the semiconductor and core AI waves are looking for the next best thing, Chen said.
“They are willing to develop good companies, but they are not in a position to win national strategic high-tech projects such as chips,” he said. “So they started looking at the consumer technology subtheme. Dreame was giving them exactly what they wanted.”
Yuen Yuen Ang, professor of political economy at Johns Hopkins University, described China’s innovation drive as a “spray and pray” approach that produces enormous output but has a high failure rate, judged less on efficiency than whether it produces few true champions.
He said the Dreame incident “fits into a recurring phase in a familiar policy cycle: taking action toward a national priority, tolerating significant gaming and waste of objectives, then correcting course.”
As Beijing tightens its grip, lower-tier governments will feel the pressure first.
If equity investment is curtailed at the county level, “local governments will not have many other tools to encourage investment,” Chen said.
