Zhang Chenghui

I. Inadequate Funds: a Major Impediment to Industrialization of High Technology

Experiences of foreign countries have proved that, in technological development system, transformation of technology into commodities is most time and money consuming. Huge amounts of financial support are needed to turn into productive forces the scientific research achievements made by scientific research institutes, universities and other departments and then to develop them into a hi-tech industry. In China, the ratio of transformation of research achievements has for years been around a low level of 5%, an important reason is the lack of funds.

1. Insufficient fiscal allocations and indirect financing

Over the past decades, we paced along the old path to transfer scientific research achievements into productive forces solely by fiscal allocations. As financial resources were limited, the funds provided by the government were far from sufficient to support the transformation of research achievements, so, some with market potential had to be shelved at the later stage of research or intermediary test for want of funds. Furthermore, due to the lack of real investment bodies and mechanisms of limiting cost, and encouraging better economic returns from investment in particular, the effect of the funds used for the transformation of research achievements was very low, therefore, it could hardly pose a virtuous cycle of investment - recovery and profits - and reinvestment on a larger scale. As a result, the reality is that scientific research and hi-tech industry are separated as if they belonged to different sectors: Scientific researchers do not care for commercial benefits for their achievements and are only concerned about how to get prizes and publish papers. The market, meanwhile, has no way to arouse the enthusiasm of researchers in upgrading products and promoting the development of enterprises and the hi-tech industry as a whole. Although the government has tried time and again to guide and promote the integration of the two segments, no remarkable improvement has been achieved.

From the mid 1980s, the government made tremendous efforts to encourage banks to support the transformation of research achievements with credit funds. Apart from approving the establishment of scientific and technological credit co-ops in various areas across the country, the government spared no efforts to adjust its credit policies and increase credit investment in scientific research. Much to our regret, however, these efforts have not achieved results as expected. Scientific and technological credit co-ops set up for scientific and technological enterprises did not operate as originally required, but turned into non-banking financial institutions to specialize in traditional credit business. Most of these co-ops were changed into urban cooperative banks in the process of restructuring credit co-ops that was launched later. Meanwhile, commercial banks became not so "obedient" as before when their reform toward commercialization was accelerated and their awareness of risk enhanced. A study report from the People’s Bank of China in 1998 showed that the enterprises located in the hi-tech development zones in Beijing, Tianjin, Jilin and other provinces and municipalities were universally haunted by shortage of funds, and a big gap existed between total demand and total supply of credit funds. Tianjin, for instance, planned an increase of RMB100 million as special loans earmarked for scientific and technological development in 1997, but the amount made available was less than RMB10 million. A recent questionnaire given out by the Management Committee of the Beijing New Technology Industrial Development and Test Zone has also revealed that only 7% of the enterprises located in the zone listed credit funds as their first choice for financial source.

The unsuccessful practices mentioned above have indicated that the financing method mainly in terms of government input or bank credit does not work as expected. On one hand, plans and administrative measures can hardly cope with disperse and diversified market demands effectively. On the other hand, commercial banks, obliged by their promises of repaying the principals and interests to depositors, have to operate in a steadfast way and seek profitability only under the precondition of safety and liquidity. This principle featured by stable business operations does not tally with the characteristics of high-tech enterprises that are unstable, lacking guarantee assets, and in need of funds for long-term equity investment. In practice, therefore, banks appear to be very prudent in their selection of target projects and would never lend unless they are fully assured of expected success. Furthermore, they would extend only short-term loans and be reluctant to long-term ones. According to a model survey conducted by the People’s Bank of China, the short-term loans within one year accounted for more than 95% of the total launched to high-tech enterprises in Tianjin in 1997.

2. Existing capital market unable to satisfy hi-tech enterprises

After the central government established the principle of actively promoting development of hi-tech industry, there has been a common understanding in recent years that the capital market should be fully utilized to make funds available to hi-tech enterprises. Departments concerned are also active in preparing for a secondary market at the Shanghai and Shenzhen stock exchanges to provide cashing services to venture capital. Nevertheless, the status quo of China’s capital market still falls far short of meeting the demand of hi-tech enterprises. The situation of Beijing New Technology Industrial Development and Test Zone is a typical example:

a) Of the 2,343 joint-stock enterprises located in Beijing’s Zhongguancun area, only three raised funds totaling RMB860 million from the stock exchange by issuing A-shares in 1998. (Study Report of Beijing New Technology Industrial Development and Test Zone, 1999)

b) There has been no example so for that any scientific and technical enterprise pooled funds through issuance of bonds or other valuable papers.

c) The property rights market in Beijing has been kept by painstaking efforts since its establishment, with less than 10 transactions concluded each year. Among these deals, no high-tech firms are involved.

d) The Beijing Municipal Government pooled RMB500 million in 1998 and set up Beijing Scientific and Technological Venture Capital Investment Co. Ltd.. With other funds earmarked for venture investment, the total amount of venture capital available in Beijing is around RMB1 billion. As these funds and the said company by and large remain at the start-up stage, the projects they support are limited. A superficial reason is the difficulty of finding promising projects, while the deep-rooted cause lies in the incompleteness of market and risks assessment systems and in some problems with the operational mechanisms of the venture investment company.

e) At present, there are three guarantee funds in Beijing for small and medium-sized high-tech enterprises, set up by the municipal government and the new technology industrial development and test zone respectively. Plus those established by district and county governments, the total amount of resources is about RMB430 million. The actual performance of guarantee transactions is far below their capacity. Many small and medium-sized enterprises generally share the view that the formalities for obtaining guarantees are too complicated and difficult, whereas the guarantee funds feel it too risky and difficult to run the business.

Without the data on total assets and capital of the enterprises located in the zone it is very difficult for us to go further with our analysis. A sample survey in the zone has revealed, however, that more than half of hi-tech enterprises agree that shortage of funds poses a major obstacle to their development and that 72.6% of enterprises have taken self-accumulation as their first choice among other financing channels. This fact indicates that the amount of funds raised from the capital market is indeed very small.

II. Why Regional Capital Markets Vital for Development of Hi-tech Industry

1. Major problems in the existing capital market

Viewed from the point of supporting hi-tech enterprises, the major problems lying in China’s capital market are manifested in the following four aspects:

a) Unitary layer. China’s current market with a unitary layer can neither meet the financing demand of a large number of small and medium-sized high-tech enterprises, nor cater to the investment preferences of different investors. Affected by various factors, China's capital market has developed towards high centralization and simplified to be two stock exchanges, one in Shanghai and the other in Shenzhen. Trading has either been banned or forced to go underground. Since the trading and management capacities of either trading system are limited, it is inevitable to exclude certain market players and give priority to the superior ones in the process of trading. Under the circumstances where the capital market has only one layer, namely, the stock exchange, this market is bound to favor big enterprises with prejudice to numerous small and medium-sized businesses. Among the latter are burgeoning high-tech enterprises. As they can’t raise sufficient funds from the capital market, they have little hope to grow rapidly into such giants as Microsoft. Although the secondary market now under construction in China will add a new layer of trading, its capacity would be limited due to its nature as an affiliate to the Shanghai and the Shenzhen stock exchanges. It is imaginable that a long line of enterprises queuing up for listing, a phenomenon at China's stock exchanges, will also appear at the secondary market.

On the other hand, investors line up at different layers due to their diverse preferences to risks. A market with a unitary layer will then keep off a number of investors and hinder a considerable amount of social funds from entering into the capital market, thus leaving them idle.

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