Will New Policy Encourage Chinese Banks to Invest in Struggling Start-Ups?

Encouraging Investment in Start-Ups

Beijing's encouragement for large commercial lenders to increase investments in unlisted companies is a significant move in the broader effort to support the country’s struggling start-ups, analysts said, though they wondered whether the big banks were ready to participate.

Regulatory Changes in Focus

Chinese authorities are now allowing the financial asset-investment arms of major commercial banks to increase their allocations to private companies, Li Yunze, director of the National Administration of Financial Regulation (NAFR), said during a briefing on Tuesday. The upper limit for investments in a single private-equity fund has been raised to 30 percent from 20 percent. He said the proportion of on-balance-sheet equity investments will rise to 10 percent from 4 percent.

State Banks and Start-Up Investments

Li Ying, head of financial institution ratings at S&P Global (China) Ratings, remarked that traditional mega banks typically aren't involved in direct equity investments in tech start-ups. “So the new policy announced [on Tuesday] is very significant,” she noted. The easing of restrictions signals that bank capital will play a more prominent role in capital markets, especially in mergers and acquisitions.

Potential Challenges Ahead

• Chinese start-ups have only raised US$26 billion this year, less than half of what was raised in previous years.
• With non-domestic investors cautious, state-owned or state-affiliated LPs are expected to dominate.
• Questions remain about the readiness of banks to engage in private equity and venture capital, given possible lack of expertise.

Michael Chang, head of Asia financials at CGS International, raised concerns about financial systemic risks and how they might impact the banks’ investments in equities. Given the nature of equities versus loans, banks remain cautious due to the potential strain on capital ratios, which measure a bank's capital relative to its risk-weighted assets.

Future investments will depend on the capital rules associated with this new policy and how they are implemented. “It is too early to tell,” Li concluded, highlighting the vagueness of current guidelines.