context: The system for allocating scitech funds was announced to undergo a reform at the Two Sessions. While complete details have not been revealed, the June 16 State Council executive meeting approval of an action plan to strengthen support for financing of technology-based enterprises is a notable development. The plan aims to incentivise financial institutions to offer a range of financial services to tech-based businesses, with a specific focus on supporting them during their early stages of development.
The action plan to strengthen support for financing of technology-based enterprises is an important boost for the innovation-driven development strategy, says Liu Jipeng 刘纪鹏 China University of Political Science and Law professor, who helped draft the Securities, State-owned Asset and Futures Trading Law. Financial policy support for scitech enterprises is urgently needed, he says, because they are at the forefront of
- boosting the real economy
- transforming and upgrading manufacturing
- fostering global competitiveness
The action plan emphasises support throughout the entire lifespan of tech companies, from inception to maturity. Liu highlights that such backing necessitates a diverse range of financing options. While venture capital equity investments are required in the start-up phase, debt financing becomes crucial at later stages. Since the action plan prioritises the start-up stage, Liu anticipates increased policy support for private equity venture capital in the near future.
The action plan reflects the significant challenges tech start-ups encounter in securing financing, says Qu Jingdong 曲敬东 a private entrepreneur. Most tech financing is sourced directly from the government or from SOEs (state-owned enterprises), he explains, which are institutionally constrained and risk-averse; consequently, these organisations typically invest only in established, medium-stage companies rather than early-stage start-ups.
Highlighting the high costs and risks of investing in tech enterprises, Liu Jianjun 刘健钧 Hunan University professor and Tsinghua University Global Private Equity Research Institute chief asserts the need for explicit policy support. Given the impracticality of bank loans for early-stage startups, he insists on a more substantial supply of risk-tolerant angel investment.
Strengthening infrastructure construction is another crucial part of the action plan, stresses Liu Chenming 刘晨明 Tianfeng Securities assistant to the director. He explains that tech start-ups often face unfair term sheets for equity investment, such as having to relinquish their intellectual property rights.
Liu Chenming adds that the action plan comes at a crucial pivot for China’s economic development, as China's economy is undergoing a significant shift from a model driven by land and labour to one driven by data, technology and high-end human capital. He argues that the capital market is instrumental in this transformation, enhancing the effective protection, valuation and exchange of these new production factors.