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Asean

Can a Chinese state venture capital fund drive innovation?

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Author: Patrick Williams, ANU

China’s new government fund for venture capital has real potential to significantly promote China’s domestic entrepreneurship and innovation. But if access to the new funding is too easy, the projects main objective will be jeopardised.

Passengers walk past an advertisement for Anbang Insurance at a metro station in Shanghai, China, 18 October 2012. Anbang Insurance Group Co, a little-known Chinese insurer until last year, has gained sudden prominence in the financial and capital markets after a string of high-profile domestic and international acquisitions. The company has been rapidly building a financial empire over the past few years by purchasing stakes of the country's banks, insurers and real estate developers, while extending its reach to financial leasing, asset management and securities brokerages through the operation of its 10 subsidiaries. (Photo: AAP)

On 14 January 2015, the State Council — China’s chief policy body — announced it will allocate 40 billion yuan (US$6.5 billion) to a new venture capital fund to support new startups and foster emerging industries. The announcement read that the fund ‘comes at the right time’, but that ‘follow-up efforts are still required to ensure the fund works’. The government said the fund will come from the government’s existing budget designated for the expansion of emerging industries. Details on how it will be managed have yet to be announced. The government has referenced the possibility of including ‘social capital’ and will invite tenders from fund managers.

The goal is to promote innovation. But the success of the fund won’t simply depend on how widely new funding is spread. Instead, it depends on the ability to pick winners from among China’s fledgling startups, foster profitable businesses, and secure market returns to investors.

China’s economic strategy has recently faced challenges. Abundant labour from China’s rural hinterland has tapered off, entitling workers to demand better wages and conditions. The global financial crisis demonstrated that demand for China’s labour-intensive exports cannot be relied upon indefinitely. China is working hard for a ‘soft landing’ from its growth slowdown by improving its economic structure. The startup venture fund is the latest concrete step toward climbing the value chain. The new fund will ‘help breed and foster sunrise industries for the future and promote [China’s] economy to evolve towards the medium and high ends’. Recent success stories such as Alibaba Group, Huawei and Lenovo signal bright possibilities for Chinese industry’s capacity for world-class innovation in competitive global markets.

China’s private small and medium enterprises (SMEs) are driving its economic growth, but they still struggle to access finance and investment. Yiping Huang wrote that China’s capital market is distorted against SMEs because of asymmetric liberalisation of China’s factor markets. Product markets have been completely liberalised, but the state deflates prices for factors of production such as capital, labour and land. The state-owned banks lend at below-market rates; as a result they don’t lend enough to meet demand. Lending is instead prioritised to asset-rich SOEs.

The government statement said SMEs — especially startups — have few or no assets to be mortgaged by banks, and must turn to other financial organisations, especially venture capital funds.

China’s venture capital market is small and has been constrained by a variety of restrictions in the past. According to research by Z-Ben capital consultancy, China has around 3100 hedge funds with RMB388 billion (US$62 billion) under management, and another 2500 private equity managers who oversee RMB1.2 trillion (US$192 billion).

Government restrictions on the venture capital market are loosening. In late 2014, regulators allowed insurance companies to invest their huge pools of premiums into venture capital. Caixin recently reported that Anbang, a relatively small Chinese insurer, is making big forays into private equity, raising questions about whether regulators are keeping up. China’s ‘princelings’ are reportedly flocking into the nascent venture capital industry.

The danger is that such a significant increase in the supply of venture capital will ‘water down’ the performance expectations of investment recipients. Recipient firms might develop the same ailment as their larger state-owned cousins: inefficiency caused by easy access to government capital.

The solution to this risk is ‘mixed capital’. The government has recognised this, and refers to the possibility of raising ‘social capital’ (or really private capital) for the fund. ‘Mixed capital’ has already been discussed in relation to improving the performance of SOEs. Zhao Changwen from the Development Research Center of the State Council wrote that ‘mixed ownership’ can raise the performance of public capital. The idea is that public capital is invested in conjunction with social capital and private investors have a say in the management of assets. CASS economist He Fan noted that if private investors are sceptical over whether they have management control of their investment in ‘mixed capital’ assets, they are unlikely to invest in these ventures.

The same goes for venture capital. If the state is to have any hope in successfully achieving a ‘mixed capital’ fund with rates of return that attract private investors, investors will need to be confident that they will have a say in investment decisions. Investors will want fund managers who can create winning formulas for picking startups and innovative SMEs. They will need to support them to become profitable businesses in order to make a return on their investment.

If the government can’t attract ‘social capital’, the failed fund may well become yet another inefficient government subsidy program, rather than a real investor in the future of innovation in Chinese industry.

Patrick Williams is a visitor at Peking University as a 2014 Prime Minister’s Endeavour Award Postgraduate Scholar, and graduate student at the Australian National University.

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Can a Chinese state venture capital fund drive innovation?

Asean

ASEAN weathering the COVID-19 typhoon

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Vietnam's Prime Minister Nguyen Xuan Phuc addresses a special video conference with leaders of the Association of Southeast Asian Nations (ASEAN), on the coronavirus disease (COVID-19), in Hanoi 14 April, 2020 (Photo:Reuters/Manan Vatsyayana).

Author: Sandra Seno-Alday, Sydney University

The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.

 

Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.

Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.

Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.

A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.

Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.

Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.

ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.

In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.

This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.

What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.

It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.

Over the longer term, ASEAN is faced with the question of whether it should seriously look…

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Tiger Trade Launches SGX Trading, Meeting Demand from Asian Investors

Access to the Singapore Exchange (SGX) adds to Tiger Brokers’ current menu of stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (NASDAQ), the world’s two largest stock exchanges, as well as the Hong Kong Stock Exchange (HKEX).

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SINGAPORE (ACN Newswire) – Tiger Trade, a one-stop mobile and online trading application by Tiger Brokers, has launched access to the Singapore Exchange (SGX).

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Asean

Can Asia maintain growth with an ever ageing population ?

To boost productivity in the future, Asian governments will have to implement well-targeted structural reforms today.

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Asia has been the world champion of economic growth for decades, and this year will be no exception. According to the latest International Monetary Fund Regional Economic Outlook(REO), the Asia-Pacific region’s GDP is projected to increase by 5.5% in 2017 and 5.4% in 2018. (more…)

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