China to Test-run New Technology Bank

By Zhao Hongmei, Duan Yinyan
Published: 2008-08-21

From Money & Investment, page 17, issue 381, Aug. 18, 2008
Translated by Zuo Maohong
Original article:

China's first-ever technology development bank may land in Beijing's Zhongguanchun and Shanghai's Pudong districs, two aspiring Chinese Silicon Valleys, if a pilot proposal receives a nod from the central government.

The proposed bank would focus on providing loans and venture capital to technology-based enterprises, thus promoting the exploration of new sciences and technologies.

The plan was jointly proposed by All-China Federation of Industry and Commerce (ACFIC), the Ministry of Science and Technology (MOST) and the Jiu San (September 3rd) Society, a political party in China.

The three had entrusted the Chinese Academy of Science and Technology for Development (CASTD) to work out a detailed implementation scheme, which was currently being scrutinized and would be submitted to banking authorities soon.

Banking Watchdogs Respond Cautiously
"After so many years of talking, we can finally look forward to something concrete happening," said a chief of the CASTD.

The EO learned that the proposal had already received the backing of some high-profile officials, including mayors of Beijing and Shanghai, a deputy committee chief of the Chinese parliament, and chiefs from the political consultative council.

Despite the strong backing, the China Banking Regulatory Commission (CBRC) was said to remain cautious, according to insider sources.

The call for setting up a bank dedicated to the technology sector had persisted for some years but with little progress. A source said the CBRC was a main hurdle, as it was skeptical of the risk control capacity of such a bank.

The source said problems hindering the planned bank from materializing included whether the bank should be policy-based or commercially driven, strict licensing rules, risk controls, and innovation in services.

A source from the CBRC said in the past that some banks declared they were specializing in high tech companies, he added: "but the services they provide today are basically no different from any other commercial banks."

"How would a bank withstand heated market competition when it only focuses on loans to high tech firms?” the CBRC source added.
The source said the success rate of small and medium technology-oriented firms was relatively low. He added these businesses generally had a shorter lifespan, and reaped high returns for high risks--characteristics contradictory to the risk control requirements of banks.

To solve their difficulty in financing, he believed a multi-layered financing system should be established instead of depending on banks solely.
License issuance would be another obstacle. Since Hainan Development Bank was shut down in 1996, banking watchdogs had approved only one share-holding bank--the Bohai Bank.

"In order to win support of the CBRC and the central bank, the proposal must be persuasive on issues like profit-making and risk controls," said a source from the Beijing Financial Office.

He added there were two options for the bank. One was to provide some supporting policies, for example, allowing moderate equity investment and a flexible interest rates, and accepting invisible assets, such as intellectual properties, as mortgages.
The other was to make the bank a subsidiary under a financial holding company, and establish a venture capital foundation and an entrepreneur investment guidance foundation, he said. 

SME Funding Difficulties
"All banks like rich companies and avoid poor ones. When a company truly needs money, the banks are reluctant; but when a company has grown and has little problem in funding, banks would voluntarily offer loans," Zhang Jun, an enterpreneuer in Zhongguancun’s Life Science Park, complained to the EO.

Statistics of the Zhongguancun Administration Commission showed that among the 20,000 high tech companies in Zhongguancun, 804 had a yearly revenue of over 100 million, and 108 were listed.

The imbalance between demand and supply in funding was obvious. After an investigation in Zhongguancun and the Yangtze River Deltar area in 2007, the ACFIC found a shortage in capital of over 40 billion yuan for all Zhongguancun's companies—averaging out to 2.8 million yuan each. Moreover, of the 120 billion yuan flowing through these companies, only a quarter was from bank loans.

This lies in stark comparison to the US' Silicon Valley Bank, established in 1983, which has garnered 5.5 billion dollars in assets and has 11,000 clients all over the world to date. Over half of the venture investment companies in the US once obtained loans from it, and its bad-debt rate was below 0.5%.

Encouraged by such a successful example, the ACFIC and MOST accelerated their lobbying for a regional technology bank in 2007. In the annual sessions of the National People's Congress (NPC) and National Committee of the Chinese People's Consultative Conference that year, a detailed proposal was submitted.

Funding became more difficult for small and medium enterprises (SMEs) in 2008. CBRC statistics revealed that of the 2.2 trillion yuan loans commercial banks had extended in the first quarter, only 300 billion yuan went to SMEs, 10% less than the same period last year.

Statistics of the National Development and Reform Commission (NDRC) issued on August 3 also showed that due to a weaker global economy and domestic macro controls, many SMEs had encountered liquidity problem. Only one tenth of them registered an industrial added value growth rate of 30% and above, which is 15% less compared to last year.

Hopefully, the pressure on developing technology-based companies would be eased within a year, when the proposed bank was scheduled to go online.