China prepares next phase of national SME fund to boost tech start-ups and IPOs

China is set to launch the second phase of its National SME Development Fund, with a specific emphasis on aiding tech start-ups and facilitating Initial Public Offerings (IPOs). This new phase was highlighted in China's 15th five-year plan, which was unveiled by the Ministry of Industry and Information Technology (MIIT) alongside nine other ministries and agencies. At a press conference in August, MIIT officials confirmed that the fund would bolster inclusive financing and initial public offering readiness.

The objective of the second phase is to provide a guiding and catalytic role, with the anticipation that it will continue to attract and pool more venture and private capital for investment in tech-focused SMEs. The first phase of the fund was launched in September 2015 and, as of March this year, had established 46 sub-funds with a combined capital pool exceeding 120 billion yuan (US$17.6 billion) invested in over 2,000 enterprises.

Additionally, it had facilitated 92 IPOs, with an overall return of approximately 15%, and completed exits from over 200 funded projects.

Wu Jing, a China Galaxy Securities analyst, emphasized that SMEs, especially early-stage and technology-based ones, continue to face challenges due to light assets, high risk, and lengthy research and development cycles. These difficulties often make it difficult for SMEs to obtain traditional credit support, as most investors are drawn to mature projects. Wu believes that the national SME fund can step in to help, offering risk-sharing and long-term investment opportunities.

The 15th five-year plan also includes support for direct and equity financing. Regional equity trading platforms will develop specialized boards for SMEs designated as "specialized, refined, distinctive and innovative" (SRDIs) by MIIT, as recognition of their niche in advanced manufacturing and cutting-edge technology. Furthermore, China's bond market will establish a tech board to assist qualified SMEs in issuing bonds for financing.

SMEs constitute the majority of China's economy and contribute significantly to government fiscal income and urban employment. However, many still face headwinds, including insufficient funding, weak domestic demand, and depressed business sentiment, despite the government's strong tech push and the booming artificial intelligence and other tech sectors. Private sector investment declined by 9.4% year-on-year in the first seven months of the current year, as reported by the National Bureau of Statistics.