China’s race to dominate global technology is running into a structural problem of its own making, one that a robot vacuum maker has helped bring sharply into focus.
Within hours of each other last Friday, a Chinese city government ordered companies to disclose their financial ties to robot vacuum maker Dreame Technology, and China’s State Council issued sweeping rules to tighten oversight of the country’s 23 trillion yuan ($3.4 trillion) private fund industry.
The back-to-back developments exposed what analysts describe as Beijing’s tough balancing act in trying to rival US tech dominance while managing the risks of unchecked state spending.
Dan Wang, China director at Eurasia Group, said Beijing is reining in a co-investment model that local authorities have embraced in recent years to lure businesses into their regions.
Local governments often “race to outspend one another” on strategic sectors, generating substantial fiscal waste and raising 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 finance, using state capital and government guidance funds to acquire stakes in startups.
Wall Street-linked US funds that once invested in China have largely pulled out in recent years due to geopolitical risk, leaving a gap for local Chinese yuan-denominated funds to fill.
Dreame became the world’s largest robotic vacuum maker by sales in the first quarter of 2026, according to research consultancy IDC, with fast-growing footholds in Europe and the US.
Since its founding in 2017, Dreame has spawned nearly a thousand affiliated enterprises spanning electric vehicles, smartphones, humanoid robots, bubble tea and satellite networks.
Founder Yu Hao claimed in January he was building an ecosystem that would “become the first $100 trillion company in human history,” a bold declaration that has since drawn uncomfortable official attention.
A city government in Jiangsu province asked local companies to audit their exposure to Dreame-linked entities, including investment sizes, fiscal outlays and business operations, according to state-backed media.
Yu’s social media account on Weibo was also suspended, preventing the outspoken founder from making viral comments, according to state-linked media.
Much of Dreame’s expansion ran on state money, with its Sky Factory Venture Capital Fund managing 41.6 billion yuan in assets, roughly 80% of it drawn from local government industry funds in Suzhou, Xiamen and other cities.
Tilly Zhang, an industrial policy analyst at Gavekal Dragonomics, said local authorities backing startups as “patient capital” inevitably invite companies to chase funding by dressing themselves up as aligned with government priorities.
Local officials “are not professional enough to distinguish between credible ones from opportunistic ones,” Zhang said, pointing to a case in 2021 when a loss-making semiconductor project in Wuhan cost the government around 15 billion yuan.
Research by Rhodium Group found local Chinese governments created thousands of such funds over the past decade, often producing duplicated investments and wasted capital.
By the end of 2025, China had set up more than 2,100 government guidance funds with target capital of over 11 trillion yuan, according to official figures.
“Singapore has Temasek. In China, every level of government has its own Temasek,” said Bob Chen, a Shanghai-based investor in a renminbi-denominated fund.
The State Council’s new guidelines call for “strict control over the establishment of new government investment funds,” barring counties and districts from setting up new funds without approval from higher levels of government.
Yuen Yuen Ang, Alfred Chandler Chair Professor of Political Economy at Johns Hopkins University, described China’s innovation drive as a “spray and pray” approach that produces enormous output but with a high failure rate, judged less by efficiency than by whether it produces a few real champions.
The Dreame episode fits “a recurring phase in a familiar policy cycle: mobilize toward a national priority, tolerate significant gaming of targets and waste, then course correct,” she said.
Chen warned that if equity investment is curtailed at the county level, “there won’t be many other levers left for local governments to drive investment.”