China has been pretty busy so far this week to follow up the PBOC decision to use a skewed interest rate cut, and the wake of this development is being filled with other progress that will favour equity markets in the financing mix going forwards.
Bloomberg is reporting on two developments: the continued scrapping of red tape for IPOs, particularly overseas, and the People’s Bank of China is going out and running a pretty intense PR campaign to convince savers that they are indeed much better off as savers in this new policy realm.
Both of these developments are important for China’s continued development of its capital markets. Making the IPO process easier just doesn’t speed up the current pipeline – it makes the prospect of starting a firm and potentially taking it through all the funding rounds a much more realistic prospect, increasing valuations at all steps of the chain, and probably prompting more people to take the leap and start their own ventures, or funding a new one.
Outlining how the real savings rate is close to 1.7% in China at the moment, it shows how much better savers are actually off in these environments, and that China’s decades of financial repression are slowly unwinding.
All in all, it looks like the structural subsidy for SOEs and giant conglomerates are coming to an end sooner rather than later. This will really help the Chinese economy diversify, and in certain areas that are currently targets for more free trade zones, I do expect that there could be a start of off-spins from large conglomerate companies, or their top human capital reserves splitting off to try specializing in one of the fields that their previous conglomerate handled. These developments could then lead to a more mature financial market in China, that would really promote higher levels of private equity activity, potentially all the way to LBO-levels of sophistication. Although these higher-market functions might expand, I do believe that the lower orders of financing, such as seed- and venture capital are much more likely to be the focus of the majority of the capital market developments going forwards. At least, the buy end looks much better these days than when I initially wrote my LBO market prospects evaluation!
On the sell end of this, as mentioned above, having much easier IPO procedures and reducing primary market red tape will make the market a whole lot friendlier. If the whole IPO pipeline that exists in China right now can be launched successfully, and overall equity market valuations can be lifted, I do think that private equity can serve an enormously important role here. The normal private equity model of building cash flows to finance paying down initially increased debts and then going to market with a company generating much stronger cash flows gets to play on over-tones of Chinese market liberalization, which will hopefully shift the financing market mix towards equity markets rather than debt markets. Private equity companies are probably the only accelerants to restructure Chinese debt into better types of debt than shadow banking (again, in China this simply means non-bank lending/financing, and would essentially cover large parts of what the rest of the world considers its financial markets, rather than any off-BS activity) into transparent, competitive financing through either banks, formal debt markets or the equity markets.
A few years from now I think private equity will have a very important role to play in China. I would lie if I said I don’t dream of being involved in that role. Thanks, PBOC!