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Prof. Huang Zhuo: Finance Commands Multiple Avenues for Supporting Tech Innovation

May 24-2024   



At the recent Langrun Policy Talk, Prof. Huang Zhuo spoke on a multi-pronged approach to harnessing financial resources to support the continuous development of technological innovation, which will then power China to grow out of investment-pulled economic model and develop new-quality productive forces. He is Deputy Dean of NSD and Executive Deputy Director of PKU Institute of Digital Finance (IDF).

 

China’s financial system is dominated by commercial banks, with a disproportionately high ratio of indirect financing, said Prof. Huang. The indirect financial system commands an enormous room for development when it comes to meeting the financing needs of tech firms. He suggested learning from Silicon Valley Bank’s credit-for-equity practices which rely on the premium of equity investment to offset loan risks. Such a setup requires banks to have profound understanding of firms so as to make relatively accurate judgement about the latter’s prospects. But he also cautioned that SVB’s grappling with challenges last year points to banks’ need to spread risks and diversify assets. In addition, Prof. Huang said that Germany’s experiences are worth looking into. Unlike many countries which segregate financial businesses, Germany uses universal banks to support tech firms. Not only do its banks offer a full line of commercial loans, but they also handle investment banking and insurance, and even small and medium enterprises’ equity issuance, asset management, asset insurance, and all the way to investment in industries.

 

Prof. Huang said that two banks in China resemble SVB: SPD Silicon Valley Bank and Zhongguancun Bank, both with a strong focus on servicing tech firms. Traditional commercial banks like Bank of Beijing are also making big moves in FinTech, while large state-owned banks such as China Construction Bank and Commercial and Industrial Bank of China are actively exploring systems catering to tech firms. Prof. Huang estimated that more trials will be conducted by banks to meet the enormous demand of the market.

 

Prof. Huang said that venture capital and private equity investment can play a more effective role in supporting tech innovation as well, and suggested casting an eye to the experiences in the US. In 2023, 7,000 funds in China’s equity investment market completed fund raising. Though the number of funds dipped by only 1.1% year on year, the total fund size dropped by 15.5%, perhaps due to cyclical reasons. Prof. Huang commended new investment modes, such as ‘Hefei Model’, by means of which the local government uses equity investment and venture capital investment to attract industries to set up shop, and invests in banks to cultivate local firms. All these lead to an expansion of local industrial chains and market size. Another popular mode concerns local governments’ guidance funds, particularly fund of funds, which work with private equity funds to invest in local industries as well as strategic and emerging ones. Prof. Huang drew attention to the importance of safeguarding the realization of strategic goals while erecting a market-based incentivization and appraisal mechanism, to capital’s need to remain patient and allow for a certain level of failed investments, and to the completion of a virtuous cycle with Tier One market strongly undergirded by a mature and efficient Tier Two market.

 

On Tier Two market, despite the launch of several pilot stock exchanges for tech firms and the implementation of the registration system, ordinary investors still face rather high hurdles, said Prof. Huang. Therefore, mutual funds have an important role to play by doubling down on product innovation, expanding investment scope, and developing tech innovation-related investment market. This will help institutional and individual investors to better invest in tech firms. Meanwhile, professional investors should step up research into tech firms, craft a professional assessment system, and propose reasonable valuations and pricing mechanisms. Prof. Huang believed that authenticity and positive growth prospects will help draw more capital and resources into the tech innovation orbit.

 

Prof. Huang Zhuo: Finance Commands Multiple Avenues for Supporting Tech Innovation

May 24-2024   



At the recent Langrun Policy Talk, Prof. Huang Zhuo spoke on a multi-pronged approach to harnessing financial resources to support the continuous development of technological innovation, which will then power China to grow out of investment-pulled economic model and develop new-quality productive forces. He is Deputy Dean of NSD and Executive Deputy Director of PKU Institute of Digital Finance (IDF).

 

China’s financial system is dominated by commercial banks, with a disproportionately high ratio of indirect financing, said Prof. Huang. The indirect financial system commands an enormous room for development when it comes to meeting the financing needs of tech firms. He suggested learning from Silicon Valley Bank’s credit-for-equity practices which rely on the premium of equity investment to offset loan risks. Such a setup requires banks to have profound understanding of firms so as to make relatively accurate judgement about the latter’s prospects. But he also cautioned that SVB’s grappling with challenges last year points to banks’ need to spread risks and diversify assets. In addition, Prof. Huang said that Germany’s experiences are worth looking into. Unlike many countries which segregate financial businesses, Germany uses universal banks to support tech firms. Not only do its banks offer a full line of commercial loans, but they also handle investment banking and insurance, and even small and medium enterprises’ equity issuance, asset management, asset insurance, and all the way to investment in industries.

 

Prof. Huang said that two banks in China resemble SVB: SPD Silicon Valley Bank and Zhongguancun Bank, both with a strong focus on servicing tech firms. Traditional commercial banks like Bank of Beijing are also making big moves in FinTech, while large state-owned banks such as China Construction Bank and Commercial and Industrial Bank of China are actively exploring systems catering to tech firms. Prof. Huang estimated that more trials will be conducted by banks to meet the enormous demand of the market.

 

Prof. Huang said that venture capital and private equity investment can play a more effective role in supporting tech innovation as well, and suggested casting an eye to the experiences in the US. In 2023, 7,000 funds in China’s equity investment market completed fund raising. Though the number of funds dipped by only 1.1% year on year, the total fund size dropped by 15.5%, perhaps due to cyclical reasons. Prof. Huang commended new investment modes, such as ‘Hefei Model’, by means of which the local government uses equity investment and venture capital investment to attract industries to set up shop, and invests in banks to cultivate local firms. All these lead to an expansion of local industrial chains and market size. Another popular mode concerns local governments’ guidance funds, particularly fund of funds, which work with private equity funds to invest in local industries as well as strategic and emerging ones. Prof. Huang drew attention to the importance of safeguarding the realization of strategic goals while erecting a market-based incentivization and appraisal mechanism, to capital’s need to remain patient and allow for a certain level of failed investments, and to the completion of a virtuous cycle with Tier One market strongly undergirded by a mature and efficient Tier Two market.

 

On Tier Two market, despite the launch of several pilot stock exchanges for tech firms and the implementation of the registration system, ordinary investors still face rather high hurdles, said Prof. Huang. Therefore, mutual funds have an important role to play by doubling down on product innovation, expanding investment scope, and developing tech innovation-related investment market. This will help institutional and individual investors to better invest in tech firms. Meanwhile, professional investors should step up research into tech firms, craft a professional assessment system, and propose reasonable valuations and pricing mechanisms. Prof. Huang believed that authenticity and positive growth prospects will help draw more capital and resources into the tech innovation orbit.