context: The 16 June State Council executive meeting approved an action plan to boost financing for technology-based enterprises. The plan aims to incentivise financial institutions to broaden their services for these businesses, with a primary emphasis on early-stage start-ups and equity investment. The specifics of the plan, however, remain undisclosed.
The central element of this plan involves cultivating a diverse pool of funding sources for tech start-ups, predominantly private equity, yet also inclusive of stocks, bonds, loans and debt, says a 21st Century Business Herald editorial. Currently, the editorial explains, local government guidance funds are the main source of tech start-up financing.
The editorial underlines the importance of a robust capital system for technological innovation. It spotlights the pivotal role that PE (private equity) funds and VC (venture capital) funds played in Silicon Valley's rise. The editorial also acknowledges China's strides in creating a supportive capital system through the establishment of the
- Beijing Stock Exchange for ‘specialised, refined and new’ SMEs
- Shanghai Stock Exchange's STAR Market for tech innovation enterprises
- Shenzhen ChiNext for growth-oriented tech enterprises
VC is facing challenges globally, the editorial notes. For instance, VC investment in the US plummeted by 73 percent y-o-y to US$12 billion in Q1 2023; the annual internal rate of return for US VC firms was negative 7 percent, the lowest since 2009. The editorial largely attributes this decline to increasing interest rates and a cyclical downturn in the internet industry.
The editorial points out that China is facing additional challenges as the US is planning an executive order to restrict American investments in certain high-tech sectors in China, including AI, quantum technology and semiconductors. The editorial emphasises that foreign VC funds have historically been vital to China’s tech financing, particularly in the software industry. With China's innovation focus shifting towards hardware (semiconductors, new materials, quantum computing, biotech), it observes that foreign investments are dwindling. This leaves tech start-ups primarily dependent on government guidance funds.