Major problems existed

In recent years, financial innovations aimed at S&T enterprise financing have played an important role in creating a good environment for independent innovation, solving the financing difficulties of S&T SMEs, and promoting enterprises to carry out independent innovation and speeding up the building of an innovative country. However, at the same time, we should also recognize that China’s financial system is still not perfect. Its resource allocation, risk management and incentive functions are relatively weak. The financial difficulties of many enterprises, especially technological SMEs, have not fundamentally changed. The support of the financial system for independent innovation still needs to be further strengthened.

The multi-level capital market is imperfect and not conducive to direct financing of technological enterprises

Generally speaking, multi-level capital markets can be divided into the main board, small board, the GEM, and other OTC trading markets. At present, there is lack of GEM markets and other OTC markets for SMEs in China’s capital markets, and the multi-level capital market has not yet been formed. Although the SME board has been set up, providing an important place for the financing of small-scale technological enterprises, there is still a problem of excessively high thresholds. In contrast, the thresholds for the GEM and other OTC exchange markets are low, which can be seen as smaller and higher growth. On the other hand, the absence of a multi-level capital market system cannot provide a smooth exit mechanism for the development of venture capital. A sound capital market system, especially the GEM, can provide this important channel. However, these conditions are not conducive to diversifying investment risks for venture capital institutions, thus hindering the development of venture capital and independent innovation.

The development mechanism of venture capital funds is imperfect and the external environment needs to be improved urgently

In recent years, China’s venture capital fund has made great progress, but there are still some obvious problems. On one hand, its overall development in China is in its infancy. The characteristics of government-led venture capital development are still relatively insignificant. The governance mechanism of venture capital companies is imperfect. The strategic investment is not enough and the investment behavior is still not standardized. Investment is not in small and medium-sized high-tech enterprises in venture stage, but in the enterprises that have developed into a certain stage or in non-high-tech enterprises and even securities institutions, thus deviating from the venture capital investment areas; some institutions are even under bankruptcy liquidation due to operational irregularities. On the other hand, the external environment for venture capital funds needs to be improved urgently. Although investment guiding funds have been set up in some places, the policy support system and tax incentive framework have not yet come into being. Also, the multi-level capital market has not yet been formed, and venture capital investment lacks an exit mechanism, which is not conducive to its development.

The development environment for private equity funds is imperfect

Private equity funds play an important role in the financing and development of high-tech enterprises. At present, there are some private equity funds in China besides the publicly funded venture capital institutions that have been openly established. In December 2005, as an important part of the Pilot Program for Financial Reform in Binhai New Area in Tianjin, the establishment of China’s first domestic-funded industry investment fund in Tianjin was given special approval. While boosting the development of Tianjin Binhai New Area, it is also an important exploration for the development of private equity funds in China. However, so far, there are still many obstacles to this process. For example, there are still some legal restrictions on the legalization of private equity funds. There are also strict restrictions on the participation of financial institutions in them. All this constrains development of private equity funds and financing of S&T enterprises, leading to backwardness in China’s private equity market.

A sound risk-sharing mechanism for loans of technological enterprises has not yet formed, restricting the development offinancing for SMEs and independent innovation

Firstly, there are a limited number of guarantee agencies for S&T SMEs. At present, these agencies in China are developing rapidly, but the number for technology-based SMEs is still relatively small. Coupled with the existence of such prominent problems as the lag of the industrial legislation, the disorder of the industry supervision, and the lack of self-regulation within the industry, their operating capability as a whole is still relatively weak, restricting them from playing their due role.

Secondly, the risk-sharing mechanism for technological enterprises’ loans is imperfect. The risk compensation mechanism of loans from banking institutions to S&T enterprises is not perfect. Although China has set up a number of risk guarantee funds to explore the development of guarantee agencies, the number and size of them are still very limited. The mechanisms and forms of support need to be further perfected, and the leverage effect of financial institutions issuing technology loans has not yet achieved maximum performance.

Thirdly, the technology and finance platform is limited, and the construction of financial infrastructure is slow. Although some places in China have set up S&T financial platforms in recent years, their numbers are still relatively low. In addition, the credit system in the process of economic restructuring is not perfect, and the support for financing of S&T enterprises needs to be further strengthened. On the other hand, the external environment of the combination of science and technology and finance is not perfect. For example, the credit system of enterprises is not widely established and the national social credit system is far from being formed. The strict access of financial markets restrict the development of community-based small and medium banks, which is not conducive to playing a supporting role of small and medium-sized banks in S&T loans, and so on.

The financial system has weak incentives for technological enterprises

Firstly, the capital market is not standardized and incentives are not sufficient. At present, there are still some obvious institutional defects in China’s capital market. In the primary market, the IPO pricing is too high and the financing intention is too strong, affecting the enthusiasm of investors and restricting the sustainable development of the capital market. In the secondary market, the phenomenon of insider information and price manipulation still exists. In addition, there is also the problem of false financial information of listed enterprises; it also runs counter to market fairness and undermines the interests of small and medium-sized investors.

Secondly, there is not enough financial innovation in capital markets. On one hand, the application of stock options is also severely restricted. Stock options are an important way to motivate managers and encourage them to work hard to promote the development of enterprises, also the case in high-tech enterprises. Due to the non-standardization of capital market in China and other factors, stock options have been shelved, so they cannot play a corresponding role. On the other hand, financial instruments such as debt-equity transfers, which help share the achievements of the development of high-tech enterprises, have not been widely used and are not conducive to obtaining high returns from high-risk loans by creditors and fail to achieve a balance between risks and returns.

In addition, equity and option plans in the financial system can also help high-tech enterprises form good incentives and enterprise governance structures.

 
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