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Pilot Programs of Private Capital Management Companies: Status Quo, Obstacles and Policy Suggestions

2015-08-14

By Zhu Hongming, Research Institute of Finance of DRC

Research Report Vol.17 No.3, 2015

Private capital management company is a new type of financial organization emerging in regional financial reform in recent years①, which aims at promoting private finance in a transparent and regulated way, and easing the problems of “Two Abundances and Two Difficulties②”. Different from small loan companies which are private financial organizations driven top-down nationwide, private capital management companies are the financial innovations of local governments, known in a few areas, and facing great policy obstacles. After the survey of some private capital management companies in Shandong, Yunnan, Wenzhou of Zhejiang and Quanzhou of Fujian, we summarize, in this paper, the experience of these pilot programs, analyze the obstacles they encountered, and put forward policy suggestions for the sound development of private capital management companies.

I. Status Quo of Pilot Programs of Private Capital Management Companies

1.Limited Number in a Few Areas Though Increasing Continuously Since its initiation in Wenzhou of Zhejiang Province at the beginning of 2012, pilot programs of private capital management companies are seen in more areas (Table 1). By the end of 2014, pilot companies have set up in many other others including the whole provinces of Shandong, Yunnan and Hubei, some cities and counties of Zhejiang, and Quanzhou of Fujian, Ji’an③ of Jiangxi Province. Overall, these pilot areas are either dynamic in private finance, such as Zhejiang, or actively promoting regional financial reform such as Wenzhou City of Zhejiang Province, Shandong Province, Quanzhou City of Fujian Province and Yunnan Province.

Table 1 Major Areas and Initiation Time of Pilot Companies of Private Capital Management

Areas

Initiation Time

Relevant Documents

Wenzhou

(Zhejiang Province)

2012

Guideline for Developing Pilot Programs of Private Capital Management Companies

Dezhou

(Shandong Province)

Aug 2012

Tentative Measures for Managing the Pilot Companies of Private Capital Management in Dezhou (No. 24, issued by Dezhou Finance Group [2012])

Cixi

(Ningbo, Zhejiang Province)

Sept 2012

Tentative Measures for Managing Pilot Service Companies of Private Capital Management in Cixi (No. 155, issued by Cixi Government Office [2012])

Quanzhou

(Fujian Province)

Apr 2013

Guidelines of Quanzhou Government for Developing Pilot Programs of Private Capital Management Companies (Trial) (No. 82, issued by Quanzhou Government [2013])

Zhejiang Province

(except for Wenzhou)

Oct 2013

 

Notice on Determining the First Group of Counties (Cities or Districts) for Launching the Pilot Innovation of Private Financing Management at the Provincial Level (No. 67, issued by Zhejiang Finance Office [2013])

Areas

Initiation Time

Relevant Documents

Shandong Province

Oct 2013

Opinions of Shandong Government on Further Regulating the Development of Private Financing Institutions (No. 33, issued by Shandong Government Office [2013])

Yunnan Province

Jan 2014

Notice of the Finance Office of Yunnan Government on Developing Pilot Programs of Private Capital Management Companies (No. 3, issued by Yunnan Finance Office [2014])

Ji’an

(Jiangxi Province)

Apr 2014

Notice of Ji’an Government on Issuing the Opinions of Ji’an City on Developing Pilot Programs of Private Capital Management Companies (No.12 , issued by Ji’an Government Office [2014] )

Hubei Province

Dec 2014

Opinions of Hubei Government on Regulating the Development of Private Financing Institutions (No. 65, issued by Hubei Government Office[2014])

Note: Some regions (except for Wenzhou) of Zhejiang Province initiated pilot programs of private capital management companies since September 2012, such as Cixi City, which issued the Tentative Measures for Managing Pilot Service Companies of Private Capital Management in Cixi (No. 155, issued by Cixi Government Office [2012]). Source: organized by the author.

2.Regional differences in the progress of advancing pilot programs, with the industrial scale of Shandong Province already accounting for about 80% of the nation’s total

There are remarkable regional differences in the progress of advancing the pilot programs of private capital management companies (Table 2). Among all the areas, Shandong Province witnesses a fast growth and biggest industrial scale of private capital management companies. By the end of 2014, the number of private capital management institutions of Shandong has reached 601, with registered capital of 33.525 billion yuan, up by 237.64% and 209.84% from the year 2013, respectively. The number of private capital management companies and their registered capital represent 150.25% and 67.08%, respectively, of the number of small loan companies and registered capital in Shandong over the same period, which is an increase of 100.39% and 40.88% respectively compared with 2013. Shandong Province accounts for about 80% of nation’s total in terms of its number of the companies and amount of the registered capital in the same period. Yunnan Province as well witnesses rapid development since it launched its pilot companies early in 2014. By the end of September 2014, its number of institutions and registered capital reached 77 and 6 billion yuan, respectively. In contrast, areas with earlier launch than Yunnan, like Wenzhou of Zhejiang Province and Quanzhou of Fujian Province, show a relatively slow progress in advancing the pilot companies.

Table 2 Basic Information of Private Capital Management Companies in Main Pilot Areas

 

 

Shandong Province

Yunnan Province

Quanzhou

(Fujian Province)

Wenzhou

(Zhejiang Province)

Number of Institutions

2013

178

0

11

11

 

Latest Statistics

601

(end of 2014)

77

(end of Sept 2014)

14

(end of Sept 2014)

12

(end of Sept 2014)

Paid-in Capital

(billion yuan)

2013

10.82 billion

0

Latest Statistics

33.525

(end of 2014)

6

(end of Sept 2014)

Less than 1 billion

(end of Sept 2014)

1.25

(end of Sept 2014)

Source: Shandong Finance Office, Yunnan Finance Office, Quanzhou Finance Bureau, Wenzhou Finance Office.

Regional differences in the progress of advancing the pilot companies can mainly be attributed to different regional policies and efforts. As for policies, Shandong practices, in general, relatively loose and reasonable policies. As for the requirements of minimum registered capital, Shandong places the lowest threshold of 30 million yuan, lower than that of local small loan companies, which helps stratify private financial organizations. As for the shareholding ratio of the main promoters, Shandong also exhibits sufficient flexibility and generality in its policies. On the one hand, Shandong sets the maximum and minimum equity proportion by main promoters (up to 51%, and no less than 20%), in an aim to prevent “dominance of one shareholder”, avoid the drawbacks of dispersed ownership in corporate governance performance, and prevent business failure risks caused by shareholders from spreading to private capital management companies. On the other hand, for companies with a certain level of risk appetite and also qualified for some conditions (i.e. registered capital of over 300 million yuan, main promoters’ assets of over 3 billion yuan, liability-asset ratio below 65%, profitable for two consecutive years, and registered in Jinan or Qingdao), Shandong has relaxed the upper limit for shareholding. As for financing, besides placing higher leverage, Shandong has established three financing channels such as shareholder’s loan, introducing holders of preferred shares, and private placement.

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①In November 2011, Wenzhou government issued “Opinions On Further Accelerating the Innovation and Development of Local Financial Sector in Wenzhou” and proposed to launch pilot programs of private capital management companies in the areas with moderately developed economy, active private capital, insufficient formal financial institutions, and with radiation effects of economies of scale. In February 2012, the first private capital management company in China was set up in Wenzhou.

②The term “Two Abundances and Two Difficulties” refers to the abundance of private capital and the SMEs as well as the difficulties in investment and in financing.

③According to the “Overall Plan for Gui’an New Area of Guizhou Province”, Gui’an New Area will also initiate pilot programs of private capital management companies.