The Financing of Private Enterprise in China
| Author | Neil Gregory and Stoyan Tenev |
| Position | Head of the Strategy and Coordination Unit in the South Asia Department/Principal Economist in the East Asia Department, of the International Finance Corporation |
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A 1999 survey of more than 600 private Chinese enterprises revealed that they relied primarily on self-financing. For China's private sector to thrive, firms will need increased access to external loan and equity financing.
China's economy has undergone a fundamental change over the past decade, from complete reliance on state-owned and collective enterprises to a mixed economy where private enterprises play a strong role. By 1998, the domestic private sector had grown to about 27 percent of GDP, making it second only to the state sector in economic importance. (The other sectors are the foreign, collective, and agriculture sectors.) Despite its growing importance, at the end of 1999, the private sector accounted for only 1 percent of bank lending, and only 1 percent of the companies listed on the Shanghai and Shenzhen stock exchanges were nonstate firms. The discrepancy between the dynamism of the private sector and its limited use of intermediated financing suggests that the private sector may not be able to sustain its current rate of growth unless it can increase its access to financing.
A survey of private firms in Beijing, Chengdu, Shunde (Guangdong), and Wenzhou (Zhejang), conducted in 1999 by the International Finance Corporation (IFC), the private sector arm of the World Bank Group, revealed that about 80 percent considered their lack of access to finance to be a serious constraint. They relied heavily on self-financing for both start-up and expansion. More than 90 percent of their initial capital came from the principal owners, the start-up teams, and their families (see table). In the case of post-start-up investments, the sample firms continued to depend overwhelmingly on internal sources (Chart 1), with at least 62 percent of their financing coming from the principal owners or out of retained earnings. Among external funding sources, informal channels, credit unions, and commercial banks were about equally represented. Outside equity, including public equity, and public debt markets played an insignificant role.
[ SEE THE GRAPHIC AT THE ATTACHED RTF ]
The relative importance of different sources of financing among surveyed firms depends on firm size. Internal sources tend to become less important as firms grow larger. External sources for the smallest firms are mainly informal channels, but their share tends to decrease as firms grow bigger, while the share of commercial bank loans increases with firm size. Commercial banks are the second most important source of funds for the largest firms, after retained earnings. This seems to indicate that banks provide more support for larger and relatively successful private firms. But, on average, Chinese banks tend to play a relatively small role in financing private firms. Only 29 percent of surveyed firms had secured loans in the previous five years.
Chinese firms rely more on internal sources of financing than do firms in transition and developed economies. A recent World Bank survey on the business environment in transition economies finds that the share of internal funding is significantly lower in advanced reformers such as Estonia (33 percent), Poland (34 percent), and Lithuania (37 percent). In the United States, a far smaller share of financing is internal; even for small and medium-sized enterprises less than two years old, internal financing reached a maximum of 54 percent of total financing.
The difficulty private Chinese firms face in obtaining financing is due partly to factors within the financial system and partly to the nature of Chinese private enterprises.
Bank incentives. Through recent reforms, China has made significant progress in reducing government interference in bank lending. However, there is ample evidence that local governments...
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