Access to Capital in China: Competitive Conditions for Foreign and Domestic Firms

Abstract

The Chinese financial sector is illustrative of the hierarchy of privilege that has dominated the country's transition from a centrally planned economy to a more market-based system. Despite their declining contribution to GDP, large state owned enterprises (SOEs) sit at the pinnacle of financial access. They obtain a disproportionate share of financing from all sources: bank loans, stock markets, venture capital, and bond markets. Because large, inefficient SOEs get most of the canalized capital, and because they are still required to provide many of the social services for their employees and families, there is a substantial bad debt problem in the system that is unhealthy to let continue but dangerous to unravel. Private firms, domestic and foreign, which in the last five years have played a critical role in China's growth, face substantial capital access barriers and must use a wide variety of informal means to obtain access to capital and pay more for it. Greater access to capital for these firms, and the full implementation of international standards of lending and market regulation, would fuel China's fastest growing enterprises and precipitate greater domestic competition.

This article begins with a description of the banking, equity, venture capital and debt sectors of China's financial system, considering both historical information and recent trends. It then addresses the competitive conditions facing foreign firms, focusing on regulatory barriers as well as practical impediments to participation in these sectors.

Keywords: China, financial sector, banks, stock markets, venture capital, bond markets

JEL Classification: E44, E58, G20, N25, P34