Fintech, as a major task of China’s future economic development, aims to establish a virtuous circle between technology, industry and finance while boosting innovation-driven productivity and advancing technological autonomy of the country.

The growth of endogenous technological innovation is both a prerequisite for sustainable technological progress and a basis for robust long-term economic growth in China.

However, technology-focused companies often face difficulties in obtaining financing due to their high-risk, high-reward, and low-capitalization nature. Traditional financial institutions, such as commercial banks, face issues such as asset valuation, credit history and lack of collateral.

Currently, China’s fintech ecosystem is struggling with shortcomings, including an underdeveloped stock market, a lagging high-yield bond market, limited integration between banks and venture capital, slow progress in financing intellectual property and the need to improve the ecosystem.

The declining contribution of technological innovation to China’s economic growth is partly linked to the diminishing laggard advantage of external technological progress.

Over the past four decades of reform and opening-up, domestic innovation has played a vital role in technological progress, but the importance of exogenous technological progress cannot be neglected.

Specifically, China has long benefited from importing, absorbing, and adapting foreign technologies for local applications. However, since the global financial crisis of 2008, the pace of external technological progress in China has slowed significantly.

One reason for this slowdown is that as domestic technological progress accelerates, the gap between China and global advanced technologies has narrowed. This makes the acquisition of cutting-edge international technologies more expensive and less accessible.

Another reason is major developed countries’ growing distrust of China’s rise, which has led to intensified efforts to impose blockades and technological restrictions.

In the foreseeable future, opportunities for external technological progress will be increasingly limited, requiring the Chinese government to effectively stimulate domestic innovation.

The growth of endogenous technological innovation is not only essential to sustain China’s technological progress, but also essential to ensure the country’s continued robust economic growth.

The process of technological innovation can be broken down into three stages: invention, innovation and diffusion of innovation. To move from invention to innovation to diffusion of innovation, companies must overcome two “valleys of death.” Successfully taking these steps requires strong support from government policies and financial systems.

Developed countries have created comprehensive equity financing systems tailored to the life cycles of technology companies, offering diversified and bridging financial services.

Additionally, technology companies in these markets can raise funds through bond issuance. In the United States, a collaborative “investment-lending link” model involving commercial banks and venture capital and private equity funds has been jointly developed for fintech companies.

In China, the development of fintech still faces several significant challenges. First, the broader stock market faces a series of interconnected problems. The long-term returns of the stock market are significantly lower than those of developed countries, and the policies related to the stock market are highly administrative, leading to difficulties in exiting stock investments in the primary market.

Additionally, the size of China’s venture capital and private equity markets has declined significantly from their peak, with foreign participation declining sharply.

According to market consultancy Zero2IPO Group, in the first three quarters of 2023, most large RMB-denominated funds were launched by state-backed managers. All funds exceeding 10 billion yuan ($1.38 billion) were held by the state, while 87 percent of funds worth between 5 billion and 10 billion yuan also had such ties.

State-run equity investment funds, mainly established by local governments, play a key role but often emphasize short-term returns, resulting in a more conservative investment style than private funds.

To ensure investment success, local governments frequently provide additional support in areas such as market access, environmental regulations and land use, thereby reducing investment risks but potentially damaging the environment. local business.

Additionally, many venture capital and private equity funds in China are not specialized enough. Good fund performance depends on expertise, particularly in specific sectors requiring in-depth, long-term research.

Second, the development of China’s high-yield bond market lags behind other segments of its bond market. Although China has become one of the world’s largest bond markets, the high yield segment is still in its infancy.

Third, Chinese commercial banks have limited involvement and effectiveness in investment-loan linkage programs targeting technology companies. Although some commercial banks have experimented with such programs, they are generally limited to collaborations between their credit and equity investment divisions or subsidiaries, rather than forming regular partnerships with external venture capital and equity funds. -investment.

Fourth, China’s IP market remains underdeveloped, with significant deficiencies in IP valuation, standardization and liquidity, which hamper the expansion of IP-based financing.

Finally, China still needs to establish a well-integrated fintech ecosystem that fosters close collaboration between governments, academia, businesses, venture capital/investment funds, and capital markets.

To address these challenges, it is crucial to accelerate China’s stock market and rule-of-law reforms. Efforts should focus on attracting long-term capital, such as pension funds, to increase the proportion of patient capital in the stock market.

China should improve the accessibility of its venture capital and private equity markets for foreign investors while promoting professionalism and market-driven growth among domestic funds. For state-backed equity investment funds, the focus should shift from short-term profitability to long-term results. Addressing challenges related to tax incentives, talent policies, entry restrictions and exit mechanisms will further optimize the investment environment.

Commercial banks should collaborate with venture capital and private equity funds to create a “technology bank” model suitable for the Chinese market. This model would promote close cooperation and information sharing between banks, funds and technology companies, thereby reducing information asymmetry and associated risks.

The creation of national and regional intellectual property markets, supported by third-party institutions, is essential to improve the valuation, standardization and liquidity of intellectual property. Innovations in IP financing include combining various IP assets as collateral, implementing multi-party financing models involving banks, governments and guarantors, and developing IP securitization products. assets based on loans backed by intellectual property.

It is essential to strengthen cooperation between governments, universities, businesses, financial institutions and capital markets. Promoting entrepreneurship and training technology leaders will help foster innovation while inspiring young researchers and students to follow similar paths.

Policy banks can play an important role in financing large national innovation platforms. Drawing on the German experience, policy banks could offer differentiated lending at below-market rates, work with commercial banks to improve efficiency, and invest in equity to strengthen the capital base of tech companies .

A credit insurance system combining the efforts, guarantees and insurance of central and local governments could mitigate risks. For example, creating a fintech risk compensation fund, streamlining the reguarantee system and establishing state-backed financing guarantees would strengthen credit support. German guarantee banks provide a model by offering loans to small and medium-sized businesses with a risk-sharing mechanism involving commercial banks and government support.

By addressing these key areas, China can strengthen its fintech infrastructure, foster innovation and ensure sustainable economic growth.

The opinions do not necessarily reflect those of China Daily.

The writer is deputy director of the Institute of Finance and Banking, part of the Chinese Academy of Social Sciences.