Financing reforms key to tech vitality

Insurance policies can also give firms a second chance after misspent R&D

Against the backdrop of a changing global economic environment, the financial sector should play an ever important role to better serve the real economy, especially in driving technological innovation, said industry experts.

The Chinese government has reiterated the importance of close ties between finance and the real economy. The Government Work Report released in March said that efforts should be made to keep the country's prudent monetary policy flexible at a reasonable and appropriate level, thus giving greater priority to serving the real economy.

The country's central bank said last June that the financial sector should serve the real economy with better quality and higher efficiency.

Zhou Xiaochuan, former governor of the People's Bank of China, highlighted the relationship between finance and the real economy at the 13th Lujiazui Forum held in early June.

Maintaining payment systems, ensuring market liquidity and providing financing to companies are the three major ways by which the financial industry helps the development of the real economy, he said.

Meanwhile, financial balance should be struck between the government and companies, and macroeconomic policies, including fiscal and monetary policies, should be drafted based on the real economy.

The extremely low mortgage rates, which led to the subprime mortgage crisis in the United States in 2008, proved the negative consequences of disconnecting financing activities from the real economy, Zhou said.

More importantly, the financial industry should direct investment into the real economy, thus helping public companies to conduct research and development into equipment, technologies and products.

"Companies' market caps will be increased and shareholders are likely to receive rich dividends. They will be able to provide more products while investors will also profit from the company's development," said Zhou, adding that the financial sector should strive to create such win-win situations.

Zhu Min, chairman of the National Institute of Financial Research at Tsinghua University, pointed out that technological innovation during the digital age is the major challenge that the financial industry will face in the following years.

"There is no doubt that technological innovation will become the most important impetus for China's economic growth. But the fact is, the financial industry has traditionally not been enamored with the idea of financing tech companies. While these small-sized companies have little collateral, they also entail higher risks and more uncertainty. Therefore, there are now few other financing channels for technology companies apart from venture capital," Zhu said.

As he suggested, carrying out deepened reform is the first step to take. Traditionally, banks, stocks, bonds and VC have been separate. But given the paramount investment required for technological innovation, all financial forces should be combined. In this sense, bank capital should be linked to the larger capital market.

"Banks' off-balance sheet activities should be developed via businesses such as wealth management. As the largest component of China's financial industry, banks should see their capital more effectively utilized. Only in this way will we see material progress made in China's technology sector," Zhu said.

To that end, more rounds of reform and opening-up should be carried out, Zhu added. Supervision should be further completed while the secondary markets for mutual funds, private equities and derivatives should be better nurtured, he said.