Industrial restructuring, tough environmental protection policies and a government campaign to remove excess capacity has taken its toll on some Chinese companies, with many struggling to adjust to these challenges. For those companies, reorganization could be an effective solution, Bai Guohong, CEO of Huarong Yufu Capital, said during a parallel session at the Ninth Global Private Equity Beijing Forum held on December 2.

Bai provided a case to elucidate how his firm functioned in the current situation. His example honed in on a sewing machine factory in east China's Zhejiang Province. With financial problems looming, namely unregulated expansion and overcapacity, bankruptcy seemed inevitable for the plant, but Huarong's Zhejiang branch came to their aid, purchasing all the company's bonds at a discounted rate and supplying abundant liquidity. As a result, the company came back to life, making it a case in point of how extra funds can help industrial enterprise get out of trouble.

Upgrade funds 

Mergers and acquisitions are popular options in the current capital market, and it is common for listed companies to grow bigger and stronger with the help of private equity firms.

Chengdu Techcent Environment Co. Ltd., a Sichuan-based company listed on the Shenzhen Stock Exchange, used to be a traditional equipment manufacturer faced with a withering market and technological obsolescence. It made a name for itself in 2016 after the successful acquisition of Bilfinger Water Technologies, the largest water treatment technology company in Germany. The deal has turned Techcent into an industry leader, providing environmentally friendly technology and services to more than 10 countries.

Techcent paid 1.7 billion yuan ($257 million) for a 100-percent stake of Bilfinger Water Technologies in the first half of 2016. Around a quarter of the money was raised through a fund jointly established by Techcent and Dongzheng Rongcheng Capital Management Co. Ltd.

Techcent is a fine example of a company that sought help from the capital market and succeeded, but it is not the only one. Reflecting a national mood epitomized by China-proposed Belt and Road Initiative, an increasing number of Chinese firms, public and private, are seeking investment opportunities, funds, technology and business resources across national boundaries.

However, without funding, the acquisition would have had no chance to succeed, demonstrating the increasing importance of private equity investment in the domestic economy.

Burgeoning industry 

China's private equity market has enjoyed fast growth in recent years. Statistics from the China Association of Private Equity show that as of September, 12,352 registered managers were in charge of 26,107 private equity and venture capital funds with a total value of 6.48 trillion yuan ($979.1 billion), a surge of 1.8 trillion yuan ($272 billion) from the end of 2016.

As a direct financing method, private equity investment is a component of the multi-level capital market and an important way of serving the real economy, said Shao Bingren, Chairman of the China Association of Private Equity.

"Private equity funds can only perform best when it is placed into the real economy, because its ultimate function is to improve a company's management and operation and optimize the allocation of resources through funding and equity transactions," Shao said in his keynote speech to the Ninth Global Private Equity Beijing Forum on December 2.

"Supporting the growth of the real economy should be the primary goal of private equity investment," Shao stressed.

He also suggested that private equity investment promote innovation in the manufacturing, new energy, new materials and biotech sectors.

As for the government's role, Shao said that while strengthening supervision, it should create a friendly environment for the development of private equity investment. State-owned enterprise reforms should be speeded up to make room for social capital.

Selective investment 

Shao also noted that the private equity industry has experienced remarkable change with the influx of state capital since 2015. Government-led funds reached 3 trillion yuan ($450 billion) in total in 2016.

Meanwhile, such involvement has spurred growth in the number of funds of funds (FOFs). According to online financial observer Chinaventure.com.cn, China had had a total of 302 market-oriented FOFs, worth a total of 1.6 trillion yuan ($241 billion) as of September 2017. The country had also established 442 government-guided funds, with a value of 3.6 trillion yuan ($544 billion) by December 2016, constituting a 138-percent rise when compared with just 1.5 trillion yuan ($227 billion) in 2015. This was mainly driven by government policies, including the mass entrepreneurship and innovation initiative, and the entrepreneurial enthusiasm triggered by development of the mobile Internet.

To make full use of the funds, Shao suggested that state capital play a bigger role in government-supported sectors with large financial demands, while private capital, being more agile and better suited to market-oriented operations, engage in the more competitive sectors.

"The retreat of state capital from the most competitive industries will generate 'blue skies' for the private sector," said Zhang Siping, Director General of the Shenzhen Innovation and Development Institute.

Zhang said at the forum that state capital should take a step back from industries centered around raw materials including coal and iron production, as well as those with greater competition such as logistics, manufacturing, services and foreign trade. He also suggested that state capital should avoid those sectors which don't fit the government's long-term plan, such as real estate, and from industries with too many operational risks.

Zhang added that Shenzhen adopted this strategy back in 2003, and consequently became a world-class, modern manufacturing and logistics center, as well as a hi-tech innovation hub. Shenzhen's economy proved the perfect incubator for a batch of the biggest companies in the world, including Huawei, ZTE and Tencent. With state capital narrowing its remit and the introduction of a strong private sector, Shenzhen went on to develop the best infrastructure in China, Zhang said.

Copyedited by Laurence Coulton 

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