China’s leaders often lament the fact that up to 90 per cent of corporate financing in the country still comes from bank loans — pointing to the need for more efficient capital markets and a domestic private equity industry, write Jamil Anderlini and Sundeep Tucker.
Now, it has established a legal framework that is expected to boost the development of China’s nascent domestic private equity players — with significant consequences for their foreign competitors.
Investments in mainland companies in 2006 doubled to $7.3bn (€5.4bn, £3.7bn) from a year earlier, says the Centre for Asia Private Equity Research. Unfortunately — from Beijing’s perspective — the sector has been dominated by foreign giants such as Carlyle Group and Texas Pacific Group. But it is well aware that a dearth of local expertise means it cannot shut the foreigners out as Tokyo and Seoul have largely managed to do.
Beijing is hoping new regulations, which went into effect on June 1, will lead to private equity funds being raised and invested in the local currency, the renminbi.
The government wants investors to use renminbi to invest in Chinese companies and, when they sell their stakes, to list them on mainland stock markets, rather than taking the country’s best to offshore stock exchanges where Chinese citizens are still not allowed to invest directly.
The new regulation establishes the first legal framework for local private equity and venture capital funds in China — recognising their unique structure and simplifying the taxes they have to pay.
Industry players expect it to cause Chinese money to pour into domestic private equity and venture capital funds in the coming years, especially from giant institutional investors such as insurance companies, banks and securities firms now sitting on hundreds of billions of renminbi.
Meanwhile, as stocks falter, Beijing mulls the chances of an investor backlash, writes Geoff Dyer.
Further sharp declines cannot be ruled out. “If it falls 30 per cent, that would be the moment that warning bells would go off in Beijing,” says Stephen Green, an economist at Standard Chartered in Shanghai.A 30 per cent drop would bring the market down to around 3,000 points, a level it last saw on March 19. Since then, more than 17m new trading accounts have been opened, many of which would be showing losses.
As well as the potential for discontent from middle-class investors, a sharper fall in the market would also damage the government’s plans for financial reform. Over the last two years, Wen Jiabao, the prime minister, has made one of his priorities the creation of a strong capital market in order to take pressure off the banks, promote more stable economic growth and to provide a platform for the development of pension assets.
One part of that strategy was to encourage citizens to put some of their bank deposits into equities and bonds. However, if the new retail investors end up with heavy losses, it could push back reform several years.
There could also be pressure on the government to bail out various parts of the public sector. While the small investors have been grabbing all the attention, some analysts believe there have been much bigger investments by state-owned companies, local governments, the police and the army.
Yet even though the authorities could face an uncomfortable backlash from some investors if there is another sharp drop in share prices, few China-watchers believe that the stock market has the ability seriously to undermine the government and generate broader political instability.
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