China's central bank encourages PE lending

The People’s Bank of China has taken two significant steps towards legitimising domestic private equity by allowing private equity into social financing and by encouraging the use of private capital in restructuring banks, according to Shanghai-based consulting firm Z-Ben Advisors.

The PBC recently announced that private equity funds and hedge funds would be eligible to engage in social financing, which includes loans, bonds and funds in China. The current participants include banks, securities and insurers, according to the Z-Ben Advisors’ website.

According to Ivan Shi, senior associate at Z-Ben, the social financing rule doesn’t change much in practice; in reality, domestic private equity has been involved in social financing unofficially for years. The difference now, however, is that China’s central bank is acknowledging private equity’s role in social financing.

“Bank credit is no longer [the major method] of small-scale financing,” Shi told PE Asia. “They are just now institutionalising that.” The Z-Ben analysis concludes that this move could “encourage a greater range of financing channels in the real economy”.

The PBC also released its 12th Five-Year Plan on Financial Industry Development and Reform on its website, which encouraged the use of qualified private capital in financial restructuring. This will give banks, securities and insurance companies access to new financing channels – which according to Shi is particularly important for local banks.

“They want to improve the competitiveness of local banks,” Shi said. Allowing private equity into banks, especially rural banks, should decrease the pressure banks are facing in capital adequacy ratios.

Shi believes that the local banks will mostly turn to domestic private equity, as foreign private equity will require working with the Ministry of Commerce. In the past, Shi said, it was very difficult for private equity to make investments; but the new regulations now allow them to go into the financial industry, which legitimises their work.

“[Other] regulatory bodies are discussing right now how they want to legitimise private equity,” Shi said.