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Multi-tiered markets gain financial advantage
China Daily
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Multi-tiered markets gain financial advantage

Tighter market regulation combined with a nuanced approach to building a multilayered capital market has accelerated China's attempts to provide easier financial services, especially funding, to technology companies as well as growth-oriented small and medium-sized enterprises in emerging or strategic sectors, market insiders said.

While tighter regulation will help improve the quality of IPOs as well as provide easier exit route for early-stage investors (like private equity or PE firms) in startups, there are two other relatively recent and related developments that have brought glad tidings to the market in the last few months: the rapid growth of secondary funds, or S funds; and the establishment of a new board for small and medium-sized enterprises specializing in niche sectors.

Together, these have the potential to significantly reshape China's capital market, experts said.

S funds enable their investors to purchase equity in unlisted firms funded by PE firms; they can also buy limited-partnership interests in PE firms themselves. Their growth offers reassurance that PE firms can easily exit their primary investments (startups), which is said to encourage more PE investments in startups.

There have been a slew of S fund launches in recent months. In early May, six State-owned enterprises in Southwest China's Sichuan province poured in 1.5 billion yuan ($207 million) to set up the province's first S fund. The aim is to seek investment opportunities in strategic sectors like electronic information, biomedicine, new energy, artificial intelligence and advanced manufacturing.

In mid-April, East China's Anhui province completed registration of a 2.8 billion yuan S fund as part of its broader effort to build a multilayered capital market.

Shanghai, the financial hub of China, of course, leads the S fund pack. Shanghai International Group or SIG, the investment arm for State-owned assets in the city, unveiled a 10 billion yuan S fund in late April. Less than a year back, SIG had initiated a 1.5 billion yuan S fund, the first of its kind launched by SOEs in the city.

Zheng Siyuan, a Shanghai-based partner in market consultancy Bain& Co's Greater China PE practice, attributed the proliferation of S funds to the tightening regulatory grip on IPOs.

Zheng said an S fund can be seen as PE firms' trading in the secondary market. This segment has, at times since 2022, overtaken direct investment in the primary market. A few common practices have since emerged: a limited partner (or capital provider) directly transfers his equity stake to another general partner (or fund manager); or one GP sells some of his/her assets to another GP.

The new board provides extensive services, including PE financing, credit financing and bond financing.

Shanghai Nutshell Therapeutics Inc, which invents small molecules in the realm of drug discovery fostered by protein dynamics, is one of the first companies to be listed on this new board.

According to Nutshell Therapeutics' founder Zhang Jian, the company, founded in 2013, is now at a critical moment of advancing its research results from preclinical stage to clinical application.

"A large amount of financial support is vital at this stage. To be listed on the new board not only connects us with more capital, but also offers various industrial resources," he said.

Traditional financial institutions have also stepped up their efforts to nurture technology startups in Shanghai.

When Zhang Qianwu, an associate professor with Shanghai University, teamed up with his partners to set up a new business in 2022 to develop a laser communication machine for inter-satellite communication, the lack of financial support was the biggest hurdle, especially because SMEs lacked collateral for bank loans.

But China Construction Bank's Shanghai branch stepped in by providing 3.5 million yuan in credit to Zhang's startup. The technology speaks for itself and can suffice as collateral, said the bank.

By the end of 2023, more than 5,000 local tech-focused companies had benefited from the special technology credit plan of CCB's Shanghai branch. Some 2,014 firms were newly included in the plan last year.

Integrated circuits, biomedicine and artificial intelligence are the major sectors that the Shanghai branch of Industrial and Commercial Bank of China focuses on, as part of its efforts to facilitate the development of "hard technologies", said the branch's deputy head Xu Yanfeng.

Bank loans worth more than 56 billion yuan have been provided to local companies specializing in the above three areas. Meanwhile, the branch has also extended its financial services to over 80 percent of the "hard technology" companies based in Shanghai, said Xu.

Cheng Fengchao, a member of the academic advisory committee at the China Association for Public Companies, said a multilevel capital market rich in various products can provide all-round financial services to technology companies.

"VC (venture capital) and PE firms provide capital to technology firms during their early-stage development, helping them with R&D and market promotion. Bonds and real estate investment trusts can provide long-term and stable financing for industrial parks and R&D centers, which form the fundamental infrastructure needed for technology innovation. The derivatives market can help companies effectively manage the risks in raw material prices and foreign exchange," he said.

"It is when companies properly address the various uncertainties in the market and technology development that innovation can be carried out without interruptions."

China DailyShen Yi

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