Pressure is building on banks to make riskier loans to tech firms. Expanding bank lending to the tech sector is imperative for the prospective self-reliant, innovative economy. 

New measures boosting lending to the sector emerged from the National Administration of Financial Regulation on 12 January 2024.

They urge

• differentiated assessment protocols for loans
• banks to lend to early-stage firms
• cooperation between banks and investment funds
• use of IP (intellectual property) as collateral

The funding needs of innovative firms cannot be met by equity and bond financing due to self-made barriers.

bank/scitech disconnect

The PRC has built the world’s second-largest banking system; Beijing seeks to leverage its scale to serve its scitech ambitions. PBoC (People’s Bank of China) Shenzhen Branch announced the city's banks are launching ‘flying loans’ to meet the funding needs of scitech firms as of December 2023, more action to coax retail banks to raise their lending to Beijing's anointed future industries. 

There is a disconnect, explains veteran reformist Shang Fulin 尚福林 CPPCC Economic Committee head, between the properties of tech firms and traditional bank business. Tending to be capital-light, such firms have huge investment needs and take longer to turn profits. Their bank loan requests must be assessed for their assets and net revenue, a test startups typically fail.

Beijing nonetheless wants banks to risk more. October 2023’s Central Financial Work Conference pronounced scitech financing indispensable for building a ‘financial power’ and supporting the real economy, which presupposes modern financial institutions. A conclave of finance, technology, and industry regulators’ on 20 November named credit as a pillar of robust tech financing. 

risking enough

Strides have been made in channelling bank credit to tech firms. By H2 2023, total loans to innovative firms were growing rapidly

• C¥2.5 tn to advanced manufacturing
  • up 41 percent y-o-y
• C¥2.36 to tech SMEs (small and medium enterprises)
  • up 25.1 percent y-o-y
• C¥2.72 tn to specialised SMEs
  • up 20.4 percent y-o-y

Ever more initiatives have been launched at multiple state levels in recent years to get credit flowing to innovative firms. Sichuan first piloted innovation loans in 2020, lending C¥30 bn through September 2023. Fujian and Zhejiang have similar programs. PBoC and other agencies created the first innovation finance reform pilot in Jinan in 2021, later expanding pilots to seven more cities. PBoC announced a new re-lending protocol in April 2023 for innovative firms, extending C¥200 bn in low-interest liquidity to 21 banks for loans to high-tech firms and specialised SMEs.

Given their massive scale, banks are primary funding sources for tech firms. Only those in later stages of development qualify, notes Tu Guangshao 屠光绍 CIC (China Investment Corporation) vice chairman.

Future industry champions can only be found if critical early and middle-stage financing allows for loss leaders. This function is performed primarily by PE (private equity) and VC (venture capital) funds. 'Small, early, and tech-focused' is the mantra of Tech financing, but banks don't seem to hear the signal.

While a global leader in green and inclusive finance, the PRC is poor at tech funding, agrees Zhang Xiaojing 张晓晶 Chinese Academy of Social Science Finance Institute. Finance’s primary role is in pricing and allocating risk, spreading tech innovation into the industry by

• socialising risk
• pricing products and assets
• circulating funds to supply liquidity for scaling

paths of promise

Banks need to upgrade their skills in valuation, lending and investment coordination and sector-specific risk management, urges Liu Hong 刘洪 Agricultural Bank of China. January’s new measures largely address expert solutions to boosting bank credit for tech firms. How these roll out remains to be seen.

Channelling credit to innovative firms, above all at the make-or-break early stage, explains Shang Fulin, needs to price risk in. State support is essential: innovation imposes positive externalities; markets, left to their own devices, would come up short in funding levels.

Sichuan’s program exemplifies a promising path. Its Scitech Bureau induced cooperation between banks, state funds and insurers to direct credit to qualified firms. A risk-sharing pool makes up 50 percent of banks' losses, countering their ingrained reluctance to lend.

Fostering technology factor markets would help solve pricing problems, argues Zeng Gang 曾刚 Shanghai Institute of Finance and Development dean. The most valuable asset held by innovative firms is their IP. Banks, however, lack the personnel or experience to price it correctly. Deep nationwide tech markets would convert IP into proper capital, realising its value and allowing banks to assess loan applications better. 

Zhang Xiaojing notes that PE/VCs may be better suited to serve early-stage innovative firms. Yet there is still room for coordination with banks: they can provide loans to the funds, with later funding rounds being used to repay bank credit. 

Credit is not all that banks provide. Growth of bank-owned wealth management companies creates a space for innovation, argues Dong Ximiao 董希淼 Fudan University Financial Research Institute. Special wealth management products focused on strategic emerging industries and other critical sectors can open new funding channels. 

Demand for professional staff is being addressed through specialised tech-focused subsidiaries. ‘Tech branches’ have been opened by retail banks from as early as 2020. Found nationwide, they lend to strategic sectors. In some cases, clients are assessed via a tech flow assessment protocol.

more to come

With the centre directing banks to risk more, state agencies and financiers will likely heed their call in 2024. Launching a new loan format for innovative firms in December 2023, Chengdu deployed a points system to determine eligibility, linking firms to pre-approved banks. The loans directly answer the Central Financial Work Conference directives, explains Gong Min 龚民 Bank of Chengdu. As Xi Jinping 习近平 repeats endlessly, scitech self-reliance is a ‘patriotic imperative’. With equities in a chronic rut and bond markets limited, Beijing has again turned to the banks.

finance scholars

Zhang Xiaojing 张晓晶 | Chinese Academy of Social Science Finance Institute director

Tech financing is all about handling risk and uncertainty. Marx identified the central role finance played in turning technology into the railroads that revolutionised human life. More of the same is needed now.

New financial ideas are needed. Financiers formerly decided loans on track record, but today, earnings forecasts must be placed onto the scales. Specialisation is critical here. Banks should foster tech-oriented subsidiaries that focus on lending to innovative firms. GGFs (government guidance funds) must also upgrade, adjusting their commitment to avoiding loss and to short-term thinking with a more holistic and long-term approach. 

Creating robust risk-sharing protocols at central and local levels remains essential. Guarantorship and insurance should be integrated while setting up a compensation pool for all participants.

A finance expert who also leads CASS’s Balance Sheet Research Centre, Zhang is a member of such influential groups as CF40 and the Economists 50 Forum. He took part in research and evaluation for the 14th 5-year plan.

Zeng Gang 曾刚 | Shanghai Institute of Finance and Development dean

Boosting tech credit entails reducing information asymmetries between investors and firms and allocating risk levels. This assumes accurate pricing, in turn assuming tech factors markets. Banks have poor records in dealing with intangible assets like technology. Setting up functioning markets will go a long way to converting IP into capital with measurable value and multiplying situations where it can be used.

Better credit integration with the industry may manifest itself physically. Banks, funds, government guidance funds, and securities companies should all set up shop within industrial parks, allowing them to provide timely support to firms according to their different needs throughout the development process. Policymakers can also use legislative means to increase credit by lowering capital constraints on loans to innovative firms.

Obtaining his doctorate in 2003, Zeng has worked in both scholarship and the private sector, with stints at Changjiang Securities, China Academy of Social Sciences and Yale University.