The Financing of Private Enterprise in China

· China’s economy has undergone a fundamental change over the past decade, from complete reliance n state-owned and collective enterprises to a mixed economy where private enterprises play a strong role

Financing Patterns

· Survey by International Finance Corporation (IFC) on China’s private firms indicates that 80 % considered their lack of access to finance to be a serious constraint. They relied heavily on self financing for both start-up and expansion. More than 90 % of their initial capital came from the principal owners, the star-up teams, and their families.

· The relative importance of different sources of financing among surveyed firms depends on firm size. Internal sources tend to become less important as firms grow larger

· Chinese firms rely more on internal sources of financing than do firms in transition and developed economies.

Factors affecting access to financing

· The difficulty of private Chinese firms face in obtaining financing is due partly to factors within the financial system and partly to the nature of Chinese private enterprises

· Other factors:

o Bank incentives : banks still do not consider a bad loan to a state-owned enterprise to be as serious as a bad loan to a private enterprise.

o Bank Procedures : The procedures, both formal and informal, rely on collateral and personal relationships rather than on project appraisal. Furthermore, they are inflexible and tailored, partly for historical reasons, to the typical state-owned enterprises

o Collateral requirements : according to the survey, the inability to meet collateral requirements is the most frequent reason for not being able to obtain a bank loan.

o Information problems

Policy agenda for financial sector

· Strengthen bank’s incentives to lend to private enterprises

· Further liberalize interest rates

· Allow banks to charge transaction fees

· Develop alternatives to bank lending, such as leasing and factoring

· Create a framework for the development of private equity

· Improve access to public equity

Conclusion

· As firms mature and grow larger, their need for external finance will grow.

· Therefore, improving private firms’ access to external financing in China is a critical point.