Forget gambling. Invest in small Chinese firms instead
known as the casino capital of Asia. But the former Portuguese colony, on China’s south coast, is hoping to gain a reputation for more reputable ways to make money. In August trading began on the, an over-the-counter market that is the first of its kind. Investors are not exchanging currencies, debt or equity. Instead, they are buying the future revenues of businesses in mainland China.
If successful, the exchange may help solve a problem that plagues smaller firms both in China and elsewhere: the difficulty of finding finance. Charles Li, a former boss of Hong Kong’s stock exchange and the creator of the new market, has said that investors tend to eschew lending to such businesses simply because the risks and rewards are poorly matched, with borrowers burdened if a venture flops and financiers short-changed if it goes well.
But Micro Connect does have a couple of selling points. If financial instruments designed to fund firms that banks won’t lend to and investors won’t buy sounds unpalatable, allocators can diversify their risk by buying up pools ofs are unrated, but the pools are given a risk indicator under a framework developed by a Chinese rating agency, which relies on predictions of cash flows.
Mr Li’s financial innovation also offers foreign investors something valuable: access to China. After decades of trying, overseas investors still have few good options. Cross-border private-equity deals have collapsed; “keepwell agreements”, between parent firms and subsidiaries, have been the subject of years-long court disputes.s are Macau-issued copies of contracts agreed on the mainland.
China’s entrepreneurs may be especially eager to make use of the scheme now. Banks are scrutinising lending more closely owing to the economy’s struggles, so firms are looking elsewhere for capital. Many are turning to outfits beyond the banking system, known as “shadow lenders”, from which China Beige Book, a data firm, says borrowing is at near-record highs as a share of total lending. This helps explain why China’s smaller firms are keen.
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