– Chun-Kit (Kitson) Ng, SJD candidate, University of Minnesota School of Law
Nearly three weeks have passed since the first-instance ruling in Yangzhou Sci-Tech Innovation Industrial Investment Fund (Limited Partnership) (hereafter “Yangzhou Sci-Tech Fund”) v. Zhongke Gaoyou. The Chinese court’s full award of RMB 47 million in principle, interest, and penalty interest appears, on its face, as a routine judgment in a civil debt dispute. In substance, however, it reflects an increasingly acute constitutional dilemma: when a local government acts both as a market participant through state-owned capital and as a regulator of the market order, how should the Chinese Constitution draw the boundary between these two roles? It bears mention that the public feedback period for the State-owned Assets Law of the PRC (Draft) (hereafter “the Draft”) had just concluded. Article 10 of that Draft explicitly calls for “reasonably distinguishing the functions of the owner from those of public administration.” Can such a distinction effectively resolve the inherent tension between the dual roles? And in fully competitive sectors, what constitutional principles should guide the “entry” and “exit” of state-owned capital?
I. The Constitutional Essence of the Dual-Role Conflict
The Chinese government’s role as a market participant derives from its status as the representative of the owner of state-owned assets. Article 9 of the Draft reaffirms that “state-owned assets are owned by the state, i.e., by the whole people, and the State Council shall exercise state ownership of state-owned assets on behalf of the state.” Article 12 further establishes a system that “combines unified state ownership with the division and classification of functions among owners at different levels.” Pursuant to this authority, local governments become the specific executors of state-owned capital, entering the market directly through vehicles such as government investment funds and state-owned capital investment and operating companies.
In Yangzhou Sci-Tech Fund v. Zhongke Gaoyou, the Yangzhou Sci-Tech Fund was a municipal state-owned asset platform of Yangzhou City, investing in a photovoltaic project in the form of convertible debt—a classic act of market participation. The government’s market regulation role, by contrast, derives from its public administrative power. The government formulates industrial policies, maintains competition, and prevents financial risks. These functions are reflected in the oversight system outlined in Articles 47 through 56 of the Draft and are further particularized in legal instruments such as the Anti-Monopoly Law and the Detailed Rules for the Implementation of the Fair Competition Review System.
The problem is this: when the same government entity both competes through state-owned capital and makes and enforces market rules, the structural bias of “acting as both the player and the referee” becomes nearly inevitable. Although Yangzhou Sci-Tech Fund v. Zhongke Gaoyou did not directly involve an antitrust dispute, state-owned capital—backed by fiscal credit, low-cost financing, and policy information advantages—objectively creates asymmetric competition when it competes with private capital on equal terms for project resources and local government support. At the constitutional level, this asymmetry raises the following question: Does Article 7 of the Chinese Constitution (according to which “The state-owned economy, i.e., the socialist economy owned by the whole people, is the leading force in the national economy. The state ensures the consolidation and development of the state-owned economy.”) imply that state-owned capital is entitled to institutional privileges superior to those of private capital in any sector, including fully competitive ones?
Article 10 of the Draft attempts to address this dilemma. It provides that the administration and supervision of state-owned assets shall “properly handle the relationship between the government and the market and reasonably distinguish the functions of the owner from those of public administration.” This is a rare provision in Chinese legal texts that directly confronts the dual-role conflict. Yet the phrase “reasonably distinguish” leaves enormous room for interpretation. The following section analyzes the possible constitutional meanings of this distinction, considering other provisions of the Draft.
II. Institutional Attempts and Unresolved Problems in the Draft
The Draft offers three institutional paths to resolve the dual-role conflict, but each faces unresolved problems.
First, the path of functional separation. Article 17 of the Draft entrusts the functions of the owner of enterprise state-owned assets to specialized institutions such as state-owned asset supervision and administration authorities, and financial departments. Articles 47 through 56 construct a multi-layered external oversight system involving people’s congress supervision, audit supervision, financial supervision, and disciplinary supervision. The logic of this design is that a specialized institution exercises the owner functions, while other institutions or procedures exercise the public administration and oversight functions, thereby achieving a relative separation of functions. The problem, however, is that all these institutions are ultimately subject to the leadership at the same level of government. The government itself is both the de facto controller of state-owned capital (through delegation) and the ultimate maker of market rules. Functional separation cannot resolve the government’s role overlap.
Second, the path of equal protection. Article 11 of the Draft explicitly provides: “The state … shall, in accordance with law, equally protect the legitimate rights and interests of the owners of state-owned assets and those of the owners of other assets, and realize complementary advantages and common development of all forms of ownership.” This provision gives concrete expression to Article 11 (non-public economy) and Article 13 (protection of private property) of the Chinese Constitution. But does “equal protection” mean that state-owned capital should not enjoy any institutional privileges when entering the market? The Draft does not answer this question clearly. In fact, Article 7 of the Draft position states that state-owned assets are the material foundation for “giving play to the leading role and strategic supporting role of the state-owned economy,” “strengthening the country’s economic power,” and “ensuring the country’s economic and social security.” This language suggests that state-owned capital carries political and strategic functions that exceed those of ordinary market participants. When these functions are projected into fully competitive sectors, an inherent tension arises between “equal protection” and “leading role.”
Third, the path of layout regulation. Article 24 of the Draft provides clear rules for the layout planning of non-financial enterprise state-owned assets: “promote concentration in important industries and key fields that bear on national security and the lifeblood of the national economy, concentration in public services, emergency response capabilities, and public welfare fields that bear on the national economy and people’s livelihood, and concentration in forward-looking and strategically important emerging industries.” This “three concentrations” formulation in effect delineates the sectors where state-owned capital should be primarily deployed. But the Draft does not explicitly exclude fully competitive sectors—those general manufacturing, consumer goods, and commercial service sectors that do not fall within the “three concentrations.” By way of reverse interpretation, state-owned capital may still enter those sectors, but such entry is not the focus of “promoting concentration.” This leaves policy discretion for the entry and exit of state-owned capital in competitive sectors.
III. How Constitutional Principles Should Guide the “Entry” and “Exit” of State-Owned Capital
In fully competitive sectors, the entry and exit of state-owned capital cannot be determined solely by policy preferences or short-term fiscal needs; such entry and exist must be constrained by constitutional principles. At least three principles merit consideration.
First, the principle of proportionality (principle of moderation). Article 15 of the Chinese Constitution establishes that “the state practices a socialist market economy,” and the market plays a decisive role in resource allocation. When the government directly participates in market competition through state-owned capital, its intervention must serve a legitimate public purpose, and the means used must be proportionate to that purpose. In fully competitive sectors, if the market mechanism can operate effectively and private capital can supply adequate products and services, state-owned capital’s entry lacks proportional justification—unless there are special strategic or security considerations. Article 24 of the Draft lists “forward-looking and strategically important emerging industries” as one of the concentration areas, which justifies state-owned capital’s entry into early-stage, high-risk hard-tech fields (such as the TOPCon photovoltaic technology at issue in Yangzhou Sci-Tech Fund v. Zhongke Gaoyou). But once an industry matures and becomes fully competitive, state-owned capital should trigger an exit mechanism. The problem in Yangzhou Sci-Tech Fund v. Zhongke Gaoyou was not that state-owned capital entered the photovoltaic sector, but that the timing (excess capacity had already become apparent in 2024) and the exit mechanism (no pre-set exit path, leaving debt collection through litigation as the only option) were improper. This suggests that the proportionality principle requires the “entry” of state-owned capital in competitive sectors to be accompanied by a clear timeline and exit criteria.
Second, the principle of functional propriety (or “institutional separation”). The constitutional theory of functional propriety requires that state tasks are assigned to the institutions best suited to perform these in terms of organizational structure, decision-making procedures, and personnel composition. The market participation function (gaining returns and guiding industries through state-owned capital investment) and the market regulation function (making fair competition rules and enforcing antitrust laws) are fundamentally different in nature. The former pursues capital appreciation and policy guidance effects; the latter pursues neutrality and fairness in market order. It is constitutionally inappropriate for the same government entity to exercise both functions simultaneously. The “reasonable distinction” required by Article 10 of the Draft is essentially a manifestation of the principle of functional propriety. To implement this principle, further steps are needed: the institutions exercising owner functions (such as state-owned asset supervision authorities and government investment funds) should be organizationally independent from the institutions exercising fair competition review and antitrust enforcement; and the investment decision-making process of government funds should avoid direct intervention by the same government’s industrial policy departments.
Third, the principle of transparency and accountability. Decisions by state-owned capital to enter or exit fully competitive sectors should be subject to democratic oversight and legal accountability. Article 46 of the Draft requires the government to report annually to the Standing Committee of the People’s Congress on the administration of state-owned assets. Article 54 grants the People’s Congress oversight powers, including hearing reports, law enforcement inspections, special inquiries, and interpellation. These are important channels for providing democratic legitimacy regarding the entry and exit decisions of state-owned capital. Specifically, before a government investment fund decides to enter a competitive industry (e.g., solar energy, semiconductors), it should submit a feasibility study to the standing committee of the People’s Congress or a special committee, explaining why market failure exists in that industry and requires state-owned capital intervention, as well as the expected exit conditions and timing. After a failed investment (as in Yangzhou Sci-Tech Fund v. Zhongke Gaoyou), the government should report to the People’s Congress on the reasons for the loss, attribution of responsibility, and corrective measures. Although Articles 57 through 59 of the Draft provide for legal liability, they focus on acts such as “failure to perform statutory duties,” “violation of authority or procedures,” and “abuse of power.” They do not explicitly require accountability for the investment decision itself—a tension with the market principle that venture capital “allows failure,” which also makes the implementation of the transparency and accountability principle difficult in practice.
IV. A Constitutional Moment
The first-instance judgment in Yangzhou Sci-Tech Fund v. Zhongke Gaoyou appears to be an ordinary contract dispute, but it raises a fundamental question that transcends the individual case: when a local government deeply intervenes in the venture capital market in the form of state-owned capital, while simultaneously acting as the guardian of market order, how should the Chinese Constitution constrain this dual role? Article 10 of the Draft— “reasonably distinguish the functions of the owner from those of public administration”—is a clear-eyed response by the legislature, but the constitutional content of the word “reasonably” has yet to be filled.
In fully competitive sectors, the “entry” of state-owned capital should be limited to exceptional cases where there is a clear market failure or a national strategic need, and must be accompanied by explicit exit conditions and time limits; the “exit” of state-owned capital should be the norm, achieved in an orderly manner through open channels such as property rights markets and securities markets, rather than forced debt collection through litigation after an investment fails. The principles of proportionality, functional propriety, and transparency and accountability together form a constitutional framework for constraining the government’s dual roles. If the Draft, in subsequent deliberations, further refines the access standards and exit mechanisms for state-owned capital in competitive sectors, and strengthens the People’s Congress’s prior review and subsequent accountability over government fund investment decisions, this will mark an important step toward the rule of law for state-owned assets in China.
Suggested citation: Chun-Kit (Kitson) Ng, A Constitutional Dilemma Under Dual Roles in China: Government as Market Participant and Regulator, Int’l J. Const. L. Blog, Sept. 14, 2026 https://www.iconnectblog.com/a-constitutional-dilemma-under-dual-roles-in-china-government-as-market-participant-and-regulator/