THE FINANCING OF PRIVATE ENTERPRISE IN CHINA

THE FINANCING OF PRIVATE ENTERPRISE IN CHINA
Neil Gregory and stoyan tenev.
“A 1999 survey of more than 600 private Chinese enterprises revealed that they relied primarily on self-financing. For china’s private sector to thrive, firm will need increased access to external loan ad equity financing”
INTRODUCTION
Ø Enterprises play a strong ruleà in 1998 had grown about 27% of GDP à end 1999 the private sector accounted only 1% of bank lendingà only 1% listed in SSX
FINANCING PATTERN
Ø Survey by International Finance corporation (IFC )1999: Beijing, Chengd, Shunde (Guangdong), and wengzhou (Zhengjang)
o 80% lack of access to financeà seriously constrainàrelied o self financing for both start-up and expansion
o 90% their initial capital came from their principal owners, the start-up team and the families
o 62% of financing coming from the principal owners or out of retained earning
o External source for the smallest firm are mainly informal channels
o On average, Chinese bank tend to play a relatively small role in financing private firmà only 29% of surveyed fir had secured loans I the previous five years
FACTOR AFFECTING ACCESS TO FINANCING
“Basically there two difficulty, partly to factors within the financial system, and partly to the nature of Chinese private enterprises”
Factors:
Ø Bank Incentive
“Local government continue to encourage bank lending to state-owned enterprise by extending explicit or implicit guarantees or through other meansà bank will discriminate against private sector firm”
Ø Bank procedure
“the procedure, both formal and non-formal, rely on collateral and personal relationship rather than on the project appraisal”
Still debatable, because we know that china today still exist become a dragon in Asia, even though they still use method like thatà look at behavioral finance.
Ø Collateral requirement
Inability to meet collateral requirements
Ø Information problem
POLICY AGENDA FOR FINANCING SECTOR
Ø Strengthen bank’s incentive to lend to private enterprises
Ø Further liberalized interest rates
Ø Allows bank to charge transaction fees
Ø Develop alternatives to bank lending, such as leasing and factoring
Ø Create a framework for the development of private equity
Ø Improve access to public equity
CONCLUSSION
Improving financing accessàneed changes in enterprises themselvesàwith the greater access to external finance, China’s private enterprises will continue to play a larger role in the growth and transformation on the Chinese economy