An essay penned by two senior figures from the People’s Bank of China highlights the need to improve the country’s equity market as a source of direct financing for enterprises.
The essay by Peng Zhenjiang (彭振江), the head of PBOC’s Nanchang central branch, and Wang Bin (王斌), the head of PBOC’s Ji’an central branch, notes that despite ongoing growth in IPO’s and the domestic bond market, China’s level of direct financing (referring to equity and bond financing) continues to lag behind that of the world’s other leading economies.
They note that the US and UK have historically been host to securities-led financial systems, where direct financing comprised 60% of the total up until the 1990’s, while Germany and Japan are host to banking-led financial systems, where the share for equity financing was around 40%.
The flourishing growth of small and medium-sized enterprises in the world’s leading economies during the late nineties, however, led to a rapid expansion in securities-based financing around the globe.
Securities-based financing accounted for over 50% of corporate financing by the turn of the century in the world’s advanced economies, including formerly bank-led countries such as Germany and Japan.
China still lags far behind other major economies when it comes to direct financing despite a rapid expansion in the country’s securities markets.
While the direct financing percentage in China had risen to 41.9% by the end of 2015, this was still far below countries that have traditionally hosted bank-led financial systems such as Germany (58.67%), Japan (58.15%), as well as other emerging economies such as India (61.21%) and Indonesia (54.95%), let alone securities-led nations such as the United States (72.36%).
The PBOC officials point out that “equity markets continue to be the main shortcoming for Chinese direct financing,” with a smaller gap between China’s corporate debt market and those of other countries.
“The corporate debt financing percentage is already commensurate with average international levels, while the equity financing percentage still awaits increase,” they wrote.
In 2015 China’s equity financing percentage was only 32.85%, far lower than most other countries for which the figure tends to be above the 50% mark.
“China’s direct financing has achieved development in tandem with the gradual reform of the economic system and the rapid growth of capital markets, but there is still a definite gap compared to the level of development of direct financing in both developed and emerging economies,” Peng and Wang write.
Based on comparison with other leading economies Peng and Wang conclude that “China’s bank loan-led financial structure is in definite need of optimisation.”
“Looking at things from a international perspective, promoting allocation of more financial resources by means of capital markets and increasing the share of direct financing is the trend of development for the the global financial system, as well as a necessary requirement for economic and social development.
“After the 2008 GFC, although the US was the centre of the crisis, its economic recovery was more rapid that of the Eurozone and Japan.
“This indirectly reflects the enhanced supporting role that financial systems with a higher percentage of direct financing can play with respect to economic flexibility and sustainable development.”
When it comes China’s own circumstances, Peng and Wang note that an increase in equity financing could “effectively expedite the country’s economic transition” by abetting the growth of SME’s and innovative enterprises.