by Fang Zhuoran

Shanghai has announced two major investment fund initiatives, each with a target size of 50 billion yuan (US$6.9 billion), as part of a broader push to accelerate industrial transformation and strengthen strategic sectors.

Unveiled on Tuesday at the 2025 Shanghai Global Investment Promotion Conference, the twin initiatives reflect the city’s ambitions to modernize its industrial base and advance reforms in the state-owned sector.

The Shanghai Industrial Transformation and Upgrade Fund (Phase II) has a planned total size of 50 billion yuan, with the first tranche of 10 billion yuan already in place. Operated on a market-oriented basis, the fund will focus on supporting key sectors such as next-generation electronic information, high-end equipment, automobiles, new materials, software and information services, and industrial services.

The second initiative is the State-Owned Capital M&A Fund Matrix, also targeting a total scale of more than 50 billion yuan. It is backed by leading municipal state-owned enterprises, financial institutions and platform companies, and will focus on SOE reform, integrated circuits, biomedicine, advanced equipment, civil aviation, commercial aerospace, and cultural and consumer sectors.

According to the Shanghai State-owned Assets Supervision and Administration Commission (SASAC), the M&A fund matrix will support industrial chain consolidation in priority sectors, helping optimize the layout of state capital and strengthen its guiding role in strategic industries.

He Qing, party secretary and director of the Shanghai SASAC, said the matrix is a key part of the city’s broader SOE reform agenda. “We will focus on enhancing core functions, investing in emerging industries, and upgrading traditional sectors through high-quality M&A to drive industrial consolidation and foster sector leaders,” he said.

He added that policy support will include streamlining state asset evaluation and approval processes, and improving performance assessment and fault-tolerance mechanisms for state-backed equity investment funds.

Shanghai has intensified its focus on M&A since Beijing issued new guidelines to reform China’s M&A market last year. In December 2024, the municipal government released a three-year action plan to support listed companies in restructuring, with a goal of achieving 300 billion yuan in total M&A transaction volume and completing a series of landmark deals by 2027.

By the end of 2024, more than 60 percent of the city’s existing state-owned funds had been restructured, activating about 40 billion yuan for new fund formation, according to SASAC.

“The fund matrix will create unprecedented opportunities for the M&A market and help drive industrial consolidation and economic upgrading,” said Lu Wen, vice president of Shanghai State-owned Capital Investment Group and chairwoman of its fund-of-funds unit.

She said many companies are under pressure from technology restrictions and global supply chain adjustments. “M&A can help companies build competitiveness and achieve technological breakthroughs,” she said, adding that SOE-backed funds could partner with leading companies in niche sectors to establish mother funds, invest in mature listed assets to become core shareholders, and acquire quality assets to gain control—all aimed at promoting industrial upgrading.

While challenges remain—including long investment horizons, complex approvals, difficulties valuing unprofitable assets, and a shortage of experienced dealmakers—Lu said M&A remains critical for building globally competitive firms.

Xin Yuesheng, senior managing director at CITIC Capital and managing partner at Trustar Capital, said China’s macroeconomic environment is increasingly favorable for M&A, citing low valuations, declining interest rates, and growing interest from international investors.

“China’s economy is entering a phase where incremental growth and activating existing assets coexist,” he said. “Private equity must shift from chasing valuations to focusing on cash flow.”

He noted that many A-share listed firms have slowed in organic growth and hold idle cash reserves, while venture investment is facing mounting difficulties. M&A, he said, can help recycle capital and accelerate business transformation. He cited Will Semiconductor’s rise through acquisitions and McDonald’s expansion in China following a joint venture with CITIC Capital as examples of successful M&A-driven growth.

Xin cautioned against speculative M&A focused on capital maneuvering, which could lead to goodwill impairments and missed earnings targets. He said strategic capabilities—such as ecosystem building, risk management, and management participation—are essential to effective integration.

In biomedicine, Liu Dawei, president of the Shanghai Biomedical Fund, said market conditions are now ripe for M&A after years of rapid expansion left some firms with cash flow issues and overvalued assets. Local governments are actively supporting M&A in the sector through dedicated funds.

Compared with mature overseas markets, Liu said China still faces hurdles in completing large-scale transactions, including smaller buyer valuations, limited cash, and regulatory constraints. However, he added that state-backed funds can help overcome these barriers through greater speed and execution efficiency.

Shanghai’s biomedicine M&A fund is structured for strategic investment and market-based operation, backed by a combination of lead investors, fund managers, state-owned firms and government guidance funds. It will support industrial chain integration, distressed asset acquisitions, and short-term product-oriented investments.

“With sustained policy support, coordinated industry action, committed capital — and enough patience — China can develop world-class companies,” Liu said.