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Research On Fiscal Policies To Support The Private Equity Industry In China

Posted on:2016-06-22Degree:DoctorType:Dissertation
Country:ChinaCandidate:X LiuFull Text:PDF
GTID:1109330470464960Subject:Public Finance
Abstract/Summary:PDF Full Text Request
The rapidly growing private equity (PE) investment is a newly developed business on international capital market, providing PE capital to start-ups in high-tech and emerging industries, as well as small and medium-sized companies, which face a lot of difficulties in financing. By raising funds privately, PE investors are able to improve corporate gonernance and performance of a target company by means of value-adding services, management consulting and industrial synergism. The PE industy’s prioriy in high-tech industries is favorable for technological innovation, industrial upgrading and optimization of resource distribution. For China in particular, it accelerates the reform of state-owned enterprises.Theologically speaking, the benefits of PE investment are not only limited to PE investors and investees, they can also spill over to society and economy at large, resembling the positive externality of public goods. Meanwhile, the market-oriented operating and selecting methods applied by PE funds can be a convenient tool for the government to realize its intentions. Through PE, fiscal capital takes on a "double-multiplier" effect by driving and leading private capital to intended directions. This article uses both imperical study and case study to investigate the effect that government imposes on PE investors and their target companies, proving that government involvement does have a positive impact in terms of investees’governance and performance, as well as reducing opportunism in PE funds. At the same time, a more developed PE market can also be beneficial for the government, helping the ladder to accompolish its goals such as optimization of industrial structure and stimulating innovation. This provides motives and possibilities for the government to support PE industry.The development of PE worldwide can be catagoried into two types:the preemptive mode and the late-comer mode. Most of the developed markets belong to the former type, in which the inner forces of the capital market alone led to the birth of PE; while emerging markets fall into the latter, with market conditions too weak to produce PE capital, thus making the government an indispensable player in PE market. Considering the fact that China’s capital market is poorly developed and PE industry is far from mature or competitive, plus PE is a highly-risky business, it is important and necessary for the government to draw up supportive policies for PE industry.Since arising in the 1980s, China’s PE industry has experienced amazing growth and fundamental adjustment after the financial crises, becoming the second largest PE market globally only second to the US. In the mean time, the interference from the government also changes from full engagement to focusing on key fields. Although there is progress in both PE industry and government policies, many problems have been exposed.Problems with the PE industry includes:firstly, the capital structure is not reasonable, with both institutional investors and debt financing insufficient. Secondly, professional talents with rich experience in PE investments are scarce. Thirdly, the investment concept, dominated by growth equity investment strategy, are not sufficient, resulting in low resource integration capability, speculative behaviors, lack of post-investing management, narrow exit channel as well as absence of behavioral formalities and industry standards.Problems with government policies includes:Firstly, legislation falls behind of PE development, private contracts are not effectively carried out, failing to establish a binding legal environment. Secondly, the regulatory system is not perfect, the traditional supervision idea based on classification of financial industry is not suitable for PE market, resulting in both excessive regulation and supervision deficiency; self-discipline has not yet formed, let alone the realization of clear-cut boundary and seamless cooperation of the two types of regulation. Thirdly, the incentives issued by local government lack consistency and stability. Fourthly, government competes with private sector in the PE market, contrary to the original intention of the supporting policies.In the future, PE in China faces historical opportunities. Current economic transition and development mode adjustment will bring about a large number of opportunities. Improvement of the multi-level capital market will expand both sources of capital and exit channels. The upgrading of industrial structure, the reform of state-owned enterprises and domestic companies going abroad will generate a series of new hot spots of merger and acquisition. In addition, stable economic growth will drive the demand for PE capital. Finally, as a late-comer, we can make full use of other countries’experiences.In view of the problems in China’s PE industry and related government policies, in order to grasp the opportunities mentioned above, I put forward a supporting policy system consisting of three layers:the core, the inner layer and outer layer. The core policy is PE funding directly from public finance, which is the basis of all supportive policies. Further, I build a decision model determining PE capital supply from the government and the private sector, then put forward suggestions such as diversifying PE capital sources and transferring benefits to the private sector. Inner policy refers to fiscal and taxation policies other than fiscal direct investment that have direct impacts on PE market, including preferential tax policies, risk compensation, government procurement, etc. Outer policy aims at establishing a sound ecological environment for PE investors by comprehensive means, such as perfecting the capital market and property trading system, reinforcing legal system including intellectual property protection and strengthening enforcement of contracts; setting up unified government regulation and self-discipline; attention to the cultivation, introduction and motivation of talents; promoting innovation and encouraging entrepreneurial spirit; construction of a credit system, increasing information supply, etc. Last but not least, I emphasize that in the mean time, the government should bring the "reverse effect" into full swing, endeavoring to guide investment directions into key industries and venture capital, encouraging local PE funds’globalization, in order to implement the leverage feature of fiscal capital and macroscopic policy intentions.
Keywords/Search Tags:Private Equity, Fiscal Policy, Support by Government
PDF Full Text Request
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