China’s worrying financial innovations

September 20, 2016 10:20
By giving listing priority to companies from poor regions, China's securities regulator might distort the return-driven nature of the capital market. Photo: CNSA

China has surpassed the west and other developed economies in online shopping, internet banking and e-payment.

However, some of the country's financial innovations are really worrying.

We are referring to a move by China's securities regulator to fast-track the issuance of stocks by companies registered in impoverished regions, and the banking regulator's efforts to encourage commercial banks to tap into venture capital investment.

According to the new rules rolled out by the China Securities Regulatory Commission (CSRC), listing applications of companies that have operated and paid income taxes in an impoverished area for three years will be processed immediately.

Currently, almost 1,000 companies are waiting for the approval of their initial public offering applications. Those at the back of the queue need to wait at least three to four years.

Given the scarcity of IPOs, successful applicants are usually able to get attractive valuations, and most offerings perform nicely.

Priority treatment is therefore a huge incentive for companies to operate in poor regions.

Some netizens joke that if one wants to get rich quick, all they have to do is set up a firm in a remote region like Qinghai or Guizhou and then apply for an IPO.

Developing the capital market and alleviating poverty are two of Beijing’s key policy targets. And the securities regulator is trying to kill two birds with one stone.

However, the authorities seem to ignore the fact that investors only care about making a profit rather than where the listed companies are from.

The CSRC is not supposed to make a choice for investors by giving priority to companies in underdeveloped regions and indirectly guiding them to invest in these firms.

The new policy will therefore distort the function of the capital market and compromise the interest of 140 million individual investors.

Along with other government agencies trying to impress top leaders ahead of the 19th National Congress of the Communist Party of China next year, the China Banking Regulatory Commission (CBRC) has also come up with a new idea.

Chinese commercial banks will soon be allowed to set up subsidiaries focusing on venture capital investment and use investment returns to offset loan losses, CBRC chairman Shang Fulin has said.

That means Chinese banks could act as private equity funds and make venture capital investment in tech startups.

Ideally, banks could support tech innovation as well as make good profit as venture capitalists.

Venture capital, by its very nature, is a highly risky business.

It’s estimated less than 10 percent of these startups will survive.

But banks are supposed to be prudent in handling the money of depositors.

As such, high-risk venture capital investments should be handled by private equity funds and other sophisticated investors.

This article appeared in the Hong Kong Economic Journal on Sept. 19.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal columnist