Financing the future: Barriers and solutions

Editor's note: Lin Yang is a senior manager from a leading commercial bank in China. The article reflects the author's personal opinions and not necessarily the views of CGTN.

China views finance as the lifeblood and technology as the primary driving force of the economy. "Technology finance," which refers to a series of financial tools, policies, and services that promote technological research and development, is particularly important today. As pointed out by the resolution of the third plenary session of the CPC's 20th Central Committee, the country will develop a financial system for scientific and technological innovation to provide greater support for major national science and technology programs and sci-tech SMEs; and improve the mechanisms for spreading the risks associated with the development of major technologies and introduce a policy system for technology insurance. To achieve that goal, financial institutions have stepped up efforts to tackle various challenges, and strengthen financial support to better help cultivate new technologies, new tracks, and new markets.

1. Challenges of technology finance

Compared with common financial services, technology finance is unique in many ways, which can lead to certain challenges.

Investing in high-tech enterprises is often associated with higher levels of risk. Compared with traditional industries such as manufacturing, high-tech industries generally have higher risks and a significantly higher proportion of bankruptcies. However, it is often these enterprises that have the greatest demand for funding. On the other hand, despite the uncertainty, once a high-tech enterprise succeeds, it can generate huge rewards, a stark contrast with traditional credit businesses. This also means that in technology finance, financial institutions cannot rely solely on risk considerations. They should have an in-depth understanding of their investment's future potential to achieve an overall balance of risk and return.

Another challenge is a mismatch in risk mitigation methods. Traditional financial services often use fixed assets such as real estate, land, factories, and production equipment as collateral to mitigate risks. However, high-tech enterprises are usually young, and their assets are mostly intangible assets such as patents, software products, etc. Therefore, these young high-tech enterprises cannot meet the risk mitigation standards of financial institutions, leading to difficulty in getting financial supports.

Financing the future also means you can't rely on current financial information to make decisions. In traditional financial services, financial reports are a very important reference for assessing the risk of loan applicants. However, for high-tech enterprises, their financial information is not mature and is by no means a primary indicator of the company's prospects. For example, high-tech enterprises often show losses and significant net cash outflows in their financial reports. It's difficult to judge the quality of the enterprise based on financial information. Instead, information such as the company's technology capacity, competitiveness, and market trend is often more important.

2. China's multi-faceted solutions

Technology finance, along with inclusive finance, green finance, pension finance and digital finance, form the five major pillars of China's financing work. To tackle the above-mentioned challenges, China has adopted a comprehensive model, fully leveraging the power of the market, financial institutions, and the government to achieve synergy.

Firstly, in the capital market, technological innovation is a long-cycle activity requiring heavy investment, thus entailing high risks, making it a perfect match for equity financing, namely "shared risks and shared returns," which naturally align with the financing needs of technological innovation. As of now, over 1,700 high-tech enterprises have been listed on China's stock market, and the management scale of venture capital funds has reached 3 trillion yuan ($423 billion).

Secondly, traditional financial institutions are actively transforming and launching a series of services to bolster technological innovation. Loans to high-tech enterprises have continued to increase in both volume and scope, with the balance of medium and long-term loans to high-tech manufacturing industries maintaining an average annual growth rate of over 30 percent. The loan attainment rate for small and medium-sized high-tech enterprises has risen from 14 percent to 47 percent. A green channel for registration and issuance of science and technology innovation bonds has been established, with the issuance scale continuously increasing. The cumulative issuance of science and technology innovation bonds has reached 800 billion yuan as of this July.

Thirdly, the government strongly supports the establishment of a technology finance system compatible with innovation, enhancing financial support for major national scientific and technological tasks as well as small and medium-sized high-tech enterprises. It has rolled out new policies that encourage long-term capital investment in early-stage, small-scale, long-term, and "hard technology" ventures. The government has refined the risk dispersion mechanism for major technological breakthroughs and established a policy framework for science and technology insurance. It has continued to improve the government-funded financing guarantee system and established the National Financing Guarantee Fund. Huge efforts have been made to address the financing difficulties and high costs faced by small and medium-sized new tech enterprises that have promising projects, competitive technologies, potential for growth, and high-value intellectual property but lack sufficient collateral. Since its establishment in 2018, the National Financing Guarantee Fund has provided re-guarantee business totaling 4.73 trillion yuan, serving approximately 4.2 million business entities.

From aerospace to quantum computing, from high-speed railways to new energy vehicles, China's technology finance has fueled the rapid advancements in technological progress in recent years. This trifecta model of market-financial institutions-government, with their seamless collaboration, has not only propelled China to the forefront of innovation, it's in itself a compelling paradigm and example that other countries and regions can learn from. As China continues to make strides in science and technology development, this unique approach serves as a great tool to better foster innovation and invest towards a more prosperous future.