In an effort to stabilize China’s struggling economy, encourage competition and continue to show major growth for their financial sector, reports have immerged describing how China is planning a pilot program designed to enable allow select commercial banks to set up direct equity investment arms to invest in technology firms. This comes as a move in defiance of China’s current commercial banking regulations which stipulate that banks are barred from investing directly in equities of non-bank institutions without government approval.
“The program is being called ‘investment and loan linkage mechanism.'”
“Fast technological innovations have created waves of opportunities,” says Wang Feng, tech entrepreneur and co-founder Geek Founders Capital, one of the firms that could potentially benefit from the investment in their equities. “As long as you’re smart, you’re going to make money.”
The program is being called “investment and loan linkage mechanism.” Details are still vague and the China Banking Regulatory Commission is being tight-lipped about the program, but an anonymous government official with direct knowledge of the plans said it will be a major focus for 2016 once granted special approval by the State Council, China’s cabinet.
“If these rule changes bring more capital to the market, its going to create more competition and put more pressure on returns for all investors,” said consulting firm Bain & Co partner Vinit Bhatia. Analysts suggest the move may be an attempt to capitalize on China’s still thriving tech sector in times of economic need. According to Bain, investments in Chinese technology, media and telecommunications hit $14.1 billion in the first half of 2015.
Much of the push seems to be to keep the Chinese tech economy feeding the overall economy. Four of the five richest Chinese work in the tech sector, including billionaire Jack Ma, founder of the Alibaba Group.
“From zero to billionaire can be as quick as six years in this new tech sector,” says Francis Liu, a Greater China manager for ultra-high-net-worth clients at UBS. This six years differs greatly from the traditional 20 years outside of China. “The ultimate goal is to help entrepreneurs grow their wealth.”
And with limited competition from Western banks — only JPMorgan Chase, Goldman Sachs, and Citigroup have limited license to operate in China — the Chinese private banking sector could get first bid at tech investments following the program’s approval.
“[Western banks] have very, very low market share, largely because they don’t have distribution,” says Sameer Chishty, a Hong Kong-based partner at Bain & Co. As it exists now, domestic Chinese banks are able to indirectly invest in tech and other firms via offshore investment affiliates. This, however, is a complicated and legally dubious process. Pending the approval of the described program, streamlining could lead to more direct and unimpeded gains for Chinese banks.
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