Hangzhou, China – June 2: Thongloun Sisrit, General Secretary of the Central Committee of the Lao People’s Revolutionary Party and President of Laos, watches the performance of the DR02 humanoid robot at Deep Robotics in Hangzhou, Zhejiang Province, China on June 2, 2026.
Wang Gang | China News Service | Getty Images
Capital inflows into China’s tech start-up world accelerated sharply this month.
Within hours last Friday, China’s city government ordered companies to disclose their financial ties to robot vacuum cleaner maker Dreamy Technology, and China’s State Council announced sweeping regulations to tighten oversight of the country’s 23 trillion yuan ($3.4 trillion) private fund industry.
These events occurred in quick succession, highlighting the tough balancing act Beijing is trying to match to America’s technological superiority. As states pour money into supporting China’s technology ambitions, there aren’t always guardrails or market forces in place to prevent widespread misallocation.
Dan Wang, China director at Eurasia Group, said the Chinese government has curbed the co-investment model that local authorities have adopted in recent years to attract companies to the region.
Local governments often “compete with each other for spending” in strategic areas, creating significant fiscal waste and increasing the central government’s credit risk, Wang said.
Since the housing crisis of the early 2020s, local governments in China have been switching from virtually bankrupt land loans to equity loans, using state capital and government guidance funds to acquire stakes in start-ups and using capital gains as new sources of fiscal revenue.
Wall Street-based US funds that once invested in China have largely withdrawn in recent years due to geopolitical risks, leaving local Chinese yuan-denominated funds to fill the gap.
Wang added that local authorities are not always able to evaluate projects the way professional investors do and tend to go all-in on one or a few hopefuls, putting their finances at risk if the bets go against them.
what happened
Dreame became the world’s largest robot vacuum cleaner maker by sales in the first quarter, according to research consultancy IDC, and is gaining a fast-growing foothold in Europe and the United States. And the startup’s ambitions go far beyond cleaning floors.
Following the aggressive expansion of certain Chinese startups, Dream has spawned around 1,000 related companies since its founding in 2017, spanning electric vehicles, smartphones, humanoid robots, bubble tea, and satellite networks. Founder Yu Hao claimed in January that he was building an ecosystem that would “become the first $100 trillion company in human history.”
The sprawl has come under intense scrutiny in recent weeks. The city government in Jiangsu province, one of China’s largest electronics manufacturing hubs, has asked local companies to audit their exposure to Dreamy-related companies, including investment size, financial expenditures and business operations, according to state media.
Yu’s Weibo social media account has also been suspended, preventing the outspoken founder from making viral comments, state media said.
China’s State Council, Changzhou municipal government and Dreamy did not respond to CNBC’s requests for comment.
Much of Dreame’s expansion was state-funded. According to state media, the company’s Sky Factory Venture Capital Fund manages assets of 41.6 billion yuan, about 80% of which is raised from industrial funds of local governments in Suzhou, Xiamen and other cities. Nearly all of the firm’s 29 funds reportedly involve local state-owned capital and are spread across more than 10 cities.
Reflecting the sprawling funding base, China’s Asset Management Association this month also called for stronger disclosures when funds invest more than 90% of their assets in a single fund.
“Patient capital”
This structure reflects how China funds its industrial strategy.
Tilly Chan, an industrial policy analyst at Gabekal Dragonomics, said local governments are being encouraged to deploy mentoring funds as “patient capital” to support startups in long-term, uncertain technology fields and give them time to grow, but this inevitably invites companies to seek funding by dressing up in line with government priorities.
While the United States indirectly supports technology companies through procurement, subsidies, and tax breaks, the Chinese government takes direct stakes at all levels, exposing public funds to valuation, exit, and governance risks.
This also increases the pressure on companies to deliver results, even in risky ventures. And much of the funding comes from state-linked funds funneled into technology for political expediency, rather than because of the technical knowledge or investment experience to back it up.
Local governments are often “not professional enough to distinguish between trustworthy and opportunistic governments,” Zhang said, citing the case of a loss-making semiconductor project in Wuhan that cost the government about 15 billion yuan in 2021.
A Rhodium Group study found that China’s local governments have created thousands of such funds over the past decade, often creating duplicative investments and wasted capital. According to official statistics, China has established more than 2,100 government-guided funds with a target capital of over 11 trillion yuan by the end of 2025.
“Singapore has Temasek. In China, every level of government has its own Temasek,” said Bob Chen, a Shanghai-based yuan-denominated fund investor, referring to Singapore’s sovereign wealth fund.
The State Council’s new guidelines aim to be that model, calling for “strict control over the establishment of new government investment funds” and prohibiting prefectures and districts from establishing new funds without the approval of senior government officials.
Chen said the rules elevate oversight to the city and local level.
“Spray and pray” approach
The state equity investment model, for all its flaws, has been a triumph and has supported the rapid rise of some Chinese high-tech companies. Hefei province’s early investments in EV maker Nio and semiconductor maker CXMT made Hefei a prime example of government venture investment.
We describe China’s innovation drive as “huge scale but low productivity,” a “spray-and-pray” approach that generates huge output but has a high failure rate.
Yuen Yuen An
Alfred Chandler Professor, Department of Political Science and Economics
Chen said smaller cities that missed the wave of semiconductors and core AI are looking for the next best thing.
“They are keen to develop blue-chip companies, but they are not in a position to win national strategic hard technology projects like chips,” he said. “So they started looking into the consumer technology subtheme, and Dream was giving them exactly what they wanted.”
Yuen Yuan Ang, a professor of political economy at Johns Hopkins University, described China’s innovation drive as “a ‘spray-and-pray’ approach that yields enormous results but has a high failure rate,” and said it is judged not on efficiency but on whether it produces a few true champions.
She said the Dreamy episode falls into the “recurring stages of the familiar policy cycle of mobilizing around national priorities, tolerating significant jockeying and waste of goals, and then correcting course.”
As the Chinese government tightens its grip, lower-level governments will likely feel the pressure first.
If equity investment is cut at the county level, “there will be little other means left for local governments to promote investment,” Chen said.
