Embracing Change: China's Tech Finance Imperative
The unique characteristics of high risk, high return, and long cycle in technological innovation determine its greater dependence on direct financing methods that can tolerate higher risks and focus on long-term returns.
Currently, there is a severe imbalance between direct and indirect financing.
On one hand, breakthroughs should be sought in top-level planning and policy formulation to truly increase the proportion of direct financing in the medium and long term.
On the other hand, focusing on the present, pilot reforms of financial institutions should be promoted in local areas of technological innovation cities such as Shenzhen and Hefei, striving to build a Chinese-characteristic technological financial system that adapts to the development requirements of new quality productive forces.
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Technological innovation is the primary connotation of new quality productive forces, and technological finance is the primary guarantee for technological innovation.
Faced with the new requirements of developing new quality productive forces and promoting Chinese-style modernization, there are bottlenecks in the existing technological system and the development of technological finance.
It is imperative to accelerate the construction of a Chinese-characteristic technological finance system and deepen the reform of the technological finance system and mechanism.
The Third Plenary Session of the 20th Central Committee of the Party has clarified the goals, directions, principles, and key points of comprehensively deepening reforms.
In terms of deepening financial system reform, actively developing technological finance is placed at the forefront of the development of the five major finances, which is of great significance.
It emphasizes the need to build a technological financial system that adapts to technological innovation and proposes a series of propositions such as increasing the proportion of direct financing, optimizing the management system of state-owned financial capital, and building a "firewall" between industrial capital and financial capital.
It focuses on promoting financial capital to invest early, small, long-term, and hard technology, and promotes a virtuous cycle of "technology-capital-industry."
As a practitioner who has been in the forefront of industrial investment and technological finance for a long time, I propose some of my own thoughts and suggestions in combination with the spirit of the Third Plenary Session of the 20th Central Committee.
01 Existing blockages and pain points of the technological finance system Firstly, there is a severe imbalance between direct and indirect financing, and the financial support for technological innovation is insufficient.
From an international perspective, the current global top 50 technology companies are still dominated by American companies, and the American financial system with a direct financing ratio as high as 81% provides strong support for the development of technology enterprises.
In contrast, the ecological soil of the domestic technological finance innovation system is significantly different.
In China's financial assets, the proportion of bank assets is as high as about 90%, and equity financing accounts for about 3% of social financing.
In the process of financial support for the rapid development of new quality productive forces, there is an inherent contradiction between the pursuit of principal safety and return certainty by indirect financing and the uncertainty of technological innovation and achievement transformation.
The motivation of indirect financing to support technological innovation is obviously insufficient.
However, the risk-sharing and benefit-sharing mechanism of direct financing, mainly venture capital, and the preference of equity investors for "high risk, high return" are more in line with the attributes of technology-based enterprises.
Issues such as "more money, less capital," and insufficient "patient capital" are widespread in China.
Secondly, there is a "mismatch in the rhythm of equity and debt," and the supply of technological finance is out of step with technological innovation.
In recent years, innovative debt and equity products for technological finance have emerged continuously, but the financing difficulties of technology companies are still widespread.
Fundamentally, under adverse selection, the current single supply model of equity and debt separation by financial institutions is difficult to truly adapt to the rhythm of equity and debt needs of technology companies.
From the perspective of technology companies, borrowing debt funds at the initial stage of development can help the company transition from a low valuation scenario to a high valuation scenario and reduce the dilution ratio of equity.
However, the high risk and fluctuating returns of early-stage technology companies make it difficult for credit funds with fixed interest returns to balance high risks and low returns, leading to a restriction on debt financing channels for early-stage technology companies.
Many financial institutions have launched inter-institutional loan and investment linkage service plans, but they are still mainly based on customer resource recommendation and sharing.
Under the background of "each calculates its own account" assessment, the essence of loan and investment linkage, "balancing current debt risks and returns through future equity returns," is difficult to implement, thereby violating the sustainable development of financial institutions' business logic.
Thirdly, there is a blind spot in the supply of technological finance, which is "focusing on enterprises and neglecting individuals."
As domestic financial support for sci-tech innovation continues to increase, the financial supply for technology companies is becoming more and more perfect.
However, the personal financing needs of technology entrepreneurs and technical backbones generated by operating technology companies are often neglected, such as the financing needs for starting businesses, equity buybacks, and investment in holding platforms that accompany the development of technology companies, which lack financing channels.
Common personal financing products in the market such as consumer loans, credit loans, and talent loans usually have small amounts and limited uses, which cannot meet actual needs.
It can be said that the reality of "focusing on enterprises and neglecting individuals" in the supply of technological financial products is contradictory to the trend of increasing personal financing needs in the process of technology company development, leading to an imbalance between supply and demand, and has become a common pain point that restricts the balance and realization of interests of entrepreneurs, managers, and technical backbones, and promotes innovation and entrepreneurship.
Fourthly, there is a blockage in the supply of technological finance, which is "imbalance in investment and withdrawal."
The government-led fund and state-owned investment platform's "investment-led introduction" investment model has become a powerful way for local governments to promote industrial landing and empower local development.
However, the problems faced by this model, such as limited own funds, reluctance to invest, and difficulty in withdrawing, are also worth paying attention to.
First, it is difficult to invest.
The frontier technology fields related to new quality productive forces usually have the risk characteristics of large investment, long cycle, and high uncertainty.
Under the pressure of limited funds, shorter investment and management and withdrawal assessment cycles, and fixed return rate assessment, only looking and not investing has become a new phenomenon of investment.
Second, it is difficult to withdraw.
IPO and mergers and acquisitions or repurchase exits are still the main paths for equity investment withdrawal, and the second-hand share transfer fund (S fund) is still in the early stage of development in China, and it also faces withdrawal issues.
The early investment guidance funds established by various local governments, in addition to accompanying the growth of enterprises to IPO for a long cycle, can only wait for other capitals to take over, but the long cycle of waiting also reduces the investment enthusiasm of social capital.
The problem of imbalance in investment and withdrawal needs to be solved urgently.
02 Four major innovations to build a Chinese-characteristic technological finance system To build a Chinese-characteristic technological finance system that adapts to the development of new quality productive forces, it is advisable to start from four aspects.
In terms of policy innovation, strengthen top-level planning and improve the level and ability of direct financing to support technological innovation.
China's exploration and practice of technological finance are still immature, and there are widespread problems such as low direct financing ratio, high thresholds, and limited channels, which restrict the ability and level of financial support for technological innovation.
It is necessary to strengthen top-level design and overall planning to establish a financial supply structure that adapts to technological innovation.
Firstly, refine and implement the requirements of "improving the institutional arrangements for state-owned enterprises to promote original innovation" in the "Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reforms and Promoting Chinese-style Modernization," and study and introduce policies and measures to encourage state-owned capital to participate in technological innovation, especially original innovation, and establish a work guide for the capitalization of state-owned assets and the fund management and operation of state-owned capital based on the LP and GP structure.
Secondly, it is recommended to further improve the direct financing functions of trusts, financial management, and insurance companies, study and improve the proportion limit of relevant funds invested in the capital market, and better guide relevant capital management institutions to increase the supply of equity market funds under the premise of legal compliance and controllable risks.
Thirdly, establish a research and revision of "Commercial Bank Law" and other related legal provisions, and suggest allowing large banks with strong capital strength to choose one or two provincial branches to pilot in the form of loan and investment linkage to invest in hard technology start-ups, or choose characteristic financial institutions in areas with innovative soil and conditions such as Shenzhen and Hefei to take the lead in piloting.
At the same time, encourage bank funds to cooperate with qualified funds in accordance with laws and regulations, focusing on the current practical problems of private equity investment institutions such as difficult fundraising and long exit cycles, and allow banks to pilot venture capital loans such as "PE loans" for funds, "GP loans" for fund managers, and "LP loans" for fund investors.
In terms of model innovation, focus on absorbing, drawing lessons from, and cultivating a blend of local and foreign experiences, and excavate and refine innovative samples of loan and investment linkage with Chinese characteristics for widespread promotion.
"Balancing current debt risks and returns through future equity returns" is the fundamental way to solve the dilemma of supply of technological finance credit.
In recent years, domestic and foreign institutions have made beneficial explorations in the business model innovation of loan and investment linkage.
According to Xingye Research data, Silicon Valley Bank in the United States has helped more than 30,000 start-ups to finance through risk loans with additional warrants for innovative enterprises, internal stock and debt coordination, and other models.
In China, there are also many such innovative samples.
For example, Shenzhen High-tech Investment Group breaks through the restrictions of the main body of the subsidiary exhibition business, fully explores the value of financial licenses of each subsidiary, and allows business personnel to operate guarantee, investment, small loans, and other businesses at the same time.
Various businesses can be converted in the assessment, which enhances the enthusiasm of practitioners and the financing experience of customers.
According to the official website data of Zhengqi Group, it has written loan and investment linkage into the company's development strategy, has served more than 6,000 enterprises, and the investment amount IPO rate has reached 40%.
Hefei Zhong'an Science and Technology Loan Company has internally opened up the assessment mechanism of debt and equity, and has truly realized "compensating loans with investment" through "loan + equity option" products, has served nearly 300 listed technology companies, and has promoted 7 credit enterprises to successfully enter the capital market through IPO or mergers and acquisitions.
In addition, Anhui Province has pioneered the "joint growth plan" credit model in the country, proposing a solution to balance the risks and returns of banks and enterprises across cycles based on priority rights.
Drawing on relevant experience, it is suggested to further innovate and improve the "loan + equity option + investment" loan and investment linkage business model to address the problem of mismatched stock and debt rhythms in the supply of technological finance.
On the one hand, weaken the approval conditions of traditional debt business, take the perspective of equity investment, and take the growth of enterprises as an important influencing factor for the approval of debt business, and superimpose the expectation of enterprise equity financing, while meeting the current debt capital needs of enterprises, it can lock its future investment rights and choose the right time to exercise options according to the rhythm and development of enterprise equity financing; on the other hand, explore the establishment of loan and investment linkage under a unified assessment system, integrate debt business and equity business into integrated operations, and balance risks and returns through calculating the total account and compensating loans with investment.In terms of product innovation, we are innovating technology and financial products to provide precise financial support throughout the entire lifecycle of technology companies.
We focus on the debt financing scenarios for technology companies, entrepreneurs, and technical backbone individuals, flexibly designing debt products, and creating a 1+N+N service system (1 technology company + N scenarios + N products).
On one hand, we closely monitor scenarios throughout the entire lifecycle of technology company growth, including situations where equity financing prices are not agreed upon and where the scale of equity financing does not meet expectations, providing debt funds as a supplement to operations; government funds are considering equity investment projects for a long time, providing short-term liquidity; assisting in dual recruitment and introduction, and helping prospective companies to sort out their original equity relationships.
On the other hand, we closely monitor the wealth growth lifecycle of technology entrepreneurs and technical backbone individuals, including scenarios such as the transformation of scientific and technological achievements by scientific workers, and the demand for startup capital that does not wish to dilute equity by introducing venture capital institutions too early; during the listing process of major shareholders and core teams of companies, we help to solve the financial needs of shareholders' paid-in capital, buyback of policy funds, employee incentive plan paid-in capital, and strategic placement.
In terms of innovation in state-owned capital assessment, we guide the strategic forces of state-owned capital to be patient capital and ferry capital that supports scientific and technological innovation.
The advantages of state-owned capital, such as serving national strategies, focusing on long-term benefits and stability, and being capital-intensive, naturally give it the characteristics of patient capital.
However, the essence of patient capital is that the investors and the evaluation and assessment system should be patient, and patient capital inevitably calls for a patient government.
In recent years, against the backdrop of a cooling in institutional LP investment, government-guided fund investment has continued to increase, and state-owned capital has become an important force in investing early, investing in new industries, and cultivating emerging industries.
However, there is a contradiction between the principle of preserving and increasing the value of state-owned capital's external investment and the uncertainty of investment returns faced by patient capital.
Requirements such as reinvestment, returns, and buyback also limit the enthusiasm of state-owned capital and government funds to support scientific and technological innovation.
It is suggested to further improve the assessment management and error tolerance supervision mechanism of state-owned capital.
First, establish an assessment orientation for overall performance and long-term returns, encouraging investment in areas such as national strategic security, national economy and people's livelihood, and strategic emerging industries, rather than financial investment aimed at financial returns.
Second, encourage differentiated setting of error tolerance and correction mechanisms for technology finance business, and due diligence exemption mechanism, appropriately increase the tolerance for equity business, enhance the implementation effect of the due diligence exemption system and investment error tolerance rate, and alleviate the concerns of state-owned capital and government funds in investing in technology companies.
New quality productive forces call for new quality financial supply.
The unique high-risk, high-return, and long-cycle characteristics of scientific and technological innovation determine that it relies more on direct financing methods that can tolerate higher risks and focus on long-term returns.
In the current dilemma of a serious imbalance between direct financing and indirect financing, on one hand, we need to seek breakthroughs in top-level planning and policy formulation to truly increase the proportion of direct financing in the medium and long term; on the other hand, we need to focus on the present, in cities of scientific and technological innovation such as Shenzhen and Hefei, start promoting pilot reforms of some financial institutions in local areas, focus on the pain points of technology company financing, respect the market operation logic of financial institutions, weaken the institutional barriers to internal conversion of debt and equity, and create a financial supply model of "investment and loan linkage, and investment to supplement loans" that technology companies are willing to accept and financial institutions actively embrace.
At the same time, we need to grasp the construction of the firewall between industrial capital and financial capital, prevent leverage-based barbaric growth and disorderly expansion caused by industrial capital controlling financial resources, truly balance "letting go and controlling", promote financial reform to a higher level, and strive to build a financial system and mechanism for scientific and technological innovation that is in line with Chinese characteristics and meets the requirements of the development of new quality productive forces.