PKU economist: Spring coming after capital market winter

This article by Eudora Wang originally appeared on China Money Network, the best data intelligence platform tracking China’s tech and venture capital markets (access requires subscription).

The Chinese investment market is expected to revive with relatively sufficient liquidity in the next two to three years after the current capital market downturn run its course. In other words, the so-called capital market winter won’t be so cold after all, says a prominent economist.

“In the next two to three years—speaking generally—I think maintaining stable economic growth will be the priority of the Chinese government,” said Se Yan, an associate professor at the Guanghua School of Management at Peking University, in a phone interview with China Money Network last week. “I forecast monetary policy will remain stable with some accommodative adjustments, so I expect liquidity [in the Chinese investment market] to be relatively sufficient.”

The remark came as the Chinese venture capital market has shown signs of recovery since the beginning of 2019, as the government initiated stimulus policies to spur growth. Proprietary statistics collected by China Money Network indicate that monthly cumulative capital raised by Chinese start-ups has been climbing, up 72.70% in the past three months compared to December 2018.

The Chinese government wants monetary policy to play a greater role in the so-called “counter-cyclical measures,” said Yan. He said Chinese monetary policy will be “fine-tuned” to channel more capital to the much-needed small and medium-sized enterprises, as well as national strategically important high-tech sectors.

At the same time, the Chinese government pledged to cut business and personal taxes by RMB 1.3 trillion ($194 billion) in 2019, 18.18% more than RMB 1.1 trillion of tax cuts in 2018. Chinese Premier Li Keqiang announced the cuts at the second session of the 13th National People’s Congress in Beijing in early March.

“Chinese tax cut policies, particularly the reduction of VAT and social security contribution rates, will primarily help SMEs, especially those in the manufacturing sector. These tax cut policies help resume confidence of these SMEs, and they will also stimulate more investments in the market,” said Yan.

Dr. Se Yan is an associate professor at the Guanghua School of Management of Peking University, and deputy director of Institute of Economic Policy Research, Peking University. He is currently a member of China Finance 40 Forum and People’s Bank of China Youth Association.

Previously, Dr. Yan served as a senior economist at the Standard Chartered Bank, heading China macro research. His research specialties are macroeconomics, economic history and Chinese economy. He leads IEPR-PKU, where he frequently provides consulting services to the Communist Party of China’s central office, the State Council, Chinese central bank and other government sections.

Dr. Yan will give an exclusive keynote speech at The Greater China Offshore Investment Summit: Managing Uncertainties in a Shifting New World Order, which is the second event of the series to be jointly held by China Money Network and Mourant on May 15 (Wednesday), 2019, in Beijing. The event will bring together economists, Chinese and international corporate leaders and top dealmakers to discuss the most pressing issues in China’s cross-border deal market, and how doing business in China is changing.

Below is an edited version of the interview.

Q: What are the key trends and challenges that you have observed related to the Chinese private equity and venture capital market?

A: I think the venture capital and private equity market is an extremely important complementary avenue to the current formal financing channels in China. In terms of market trends, first, I think Chinese VC and PE companies are particularly interested in the booming high-tech industries, which refer to fields like technology, media and telecommunications; information technology; biomedical technology; military technology; and aerospace. Second, these companies are getting increasingly important in terms of the amount of capital they are able to mobilize. They act as important vehicles in fostering the growth of China’s innovation, and improving the overall technological capability of the country. Moreover, the Chinese VC and PE market also plays a more and more important role in realizing the industrial application of academic achievements.

Challenges for Chinese VC and PE companies include how they can successfully exit investments through either public listing or bank financing. I think sometimes they still face difficulties in that regard. Meanwhile, I think these high-tech industries favored by Chinese VC and PE companies still face either technical uncertainties or policy uncertainties, such as domestic policies related to high-tech industries and U.S.-China trade frictions. These uncertainties have a pretty large, sometimes adverse, impact on investments in the Chinese VC and PE market.

At the same time, China’s fluctuating macro-economic policy, including monetary policy, could also be a challenge. The Chinese government is using monetary policy to adjust liquidity in order to macro-adjust economic growth. The authority wants monetary policy to play a bigger role in the so-called “counter-cyclical measures.” Specifically speaking, when the economy is not doing well, the government will relax monetary policy to cut taxes and increase spending; otherwise, the government will tighten monetary policy to reduce spending. These counter-cyclical policies are changing constantly, which casts uncertain effects on VC and PE companies in their fundraising activities.

Q: While talk of a VC winter is frequent nowadays, the market has seemed to recover a bit in recent months. What are your predictions for the PE and VC market in the next 12 months?

A: In the next two to three years—speaking generally—I think maintaining stable economic growth will be the priority of the Chinese government. I forecast that monetary policy will remain stable with some accommodative adjustments, so I expect the liquidity to be relatively sufficient. Generally speaking, I think the Chinese VC and PE market will keep growing in the next two to three years.

Q: Could you please name the top three policies that drive the medium-term boom in the Chinese economy?

A: First of all, Chinese tax cut policies, particularly the reduction of VAT and social security contribution rates, will largely help SMEs, especially those in the manufacturing sector. These tax cut policies help restore confidence of these SMEs, and they will also stimulate more investments in the market, which will contribute to the Chinese medium-term boom.

Secondly, I think the Chinese government is going to make a lot of large-scale investments in the infrastructure of information, communication, poverty reduction and environmental protection. These large investments will be able to stabilize the economy and contribute to the medium-term boom.

The last one is the Chinese monetary policy, which will be fine-tuned to direct more money to the much-needed SMEs and national strategically important high-tech sectors. Fine-tuned monetary policy will also support the economic boom in the next two to three years.

Q: In terms of Chinese outbound deals, what trends do you see?

A: I think Chinese outbound direct investment will focus on acquiring raw materials and energy like petroleum because China is the world’s largest petroleum importer. Investments in strategically important metals and other raw materials, and clean energy like natural gas will also increase since China is using natural gas to replace coal out of environmental protection concerns.

Other fields for Chinese ODI will be high-tech industries that can help resolve the most urgent demands in the country’s booming economy. For example, we are facing higher labor costs and labor shortages, so high-tech sectors that are able to replace unskilled labor, including industrial robots, automation and other intelligent technologies, will be attractive for Chinese overseas mergers and acquisitions.

Q: In what regions and countries do you expect Chinese dealmakers to focus their overseas investments?

A: China has become the world’s second largest economy, so I think China’s interests in terms of ODI will be on the global sphere. However, realistically speaking, emerging markets will certainly become Chinese favorites because they are more accessible, and they have rich resources and abundant markets for Chinese outputs. Meanwhile, the current relationship between China and the U.S. is a little bit bumpy. Chinese Premier Li Keqiang is visiting Europe, so in terms of developed countries, I think China, Europe, Japan and also the US, will be among Chinese favorites for ODI.

China and these countries can significantly complement each other in economic construction, with more focus on resources in emerging markets, and more focus on high technologies in developed countries. However, I think it’s not practical to name all these countries. China has specified a range of emerging markets with which it hopes to develop mutually beneficial relations in the Belt and Road Initiative.

Q: What’s your advice to Chinese investors who are involved in outbound investment activity?

A: First, investors should invest in areas tightly related to their main lines of businesses. Second, investors need to be rational in evaluating their ability to raise capital: I see many companies sealed investment agreements, but they eventually found it difficult to get enough capital to complete the investments.