Winter Has Stayed for China’s Primary Equity Market (AI Translation)

【周刊提前读】股权一级市场仍处寒冬 募资与退出皆待转机

The ongoing narrative in China's capital markets reflects a complex interplay between the primary (VC/PE) and secondary markets. Despite a recent revival in secondary market activity, private equity investors like those in CICC Capital, who led the industry with nine IPO exits in early 2024, describe the ongoing situation as a "capital winter" [para. 1]. The third quarter of 2024 witnessed the formation of 1,270 new VC/PE funds in China — a notable year-over-year decline of 41% [para. 2].

Contrastingly, IPO activities have significantly dwindled. The third quarter saw only 52 Chinese companies going public globally, marking an annual decline of 52.29%. Specifically, A-share IPOs reduced by over 70%, with less than 48 billion yuan raised in the first three quarters of 2024, marking an 85.09% decrease from the previous year [para. 3]. The China Securities Regulatory Commission's phased IPO tightening since August 2023 has exacerbated the exit struggles for Chinese VC/PE firms [para. 4].

The government has launched several policy measures since 2024 to support the primary market amidst these challenges. Notable actions include the Politburo's advocacy for expanding venture capital and the State Council's launch of policies promoting high-quality capital market development. These measures aim to invigorate fundraising, investment, management, and exit activities in VC/PE [para. 6].

Industry insiders highlight that difficulties in "fundraising, investing, managing, and exiting" persist, particularly emphasizing exit challenges as a major hurdle to quality development in the VC/PE industry. The State Council's recent meeting stressed improving market liquidity [para. 9]. The Caixin Data Special Report reflects similar sentiments, projecting increased IPO activity as pivotal for industry recovery [para. 12].

As IPOs remain constrained, industry leaders discuss diversifying exit strategies such as mergers and acquisitions (M&A). The China Securities Regulatory Commission recently encouraged M&A activities, offering favorable conditions for such transactions, albeit with ongoing challenges tied to ensuring sustained profitability [para. 19]. Enhanced regulatory flexibility in M&A fosters a more supportive environment for primary market exits, encouraging tech-driven acquisitions [para. 23]. However, experts caution against over-reliance on M&A as a substitute for IPOs [para. 28].

State-owned capital has traditionally been central to China's VC/PE market, yet its low risk tolerance presents challenges. Recent regulations aim to optimize government venture capital fund management, encouraging risk-taking and reforming assessment and fault tolerance mechanisms [para. 42]. Various local governments have started adjusting their policies, allowing more leeway for loss tolerance in venture investments. For example, several provinces have introduced risk subsidy schemes and revised evaluation metrics to reduce the burden on state ventures [para. 48].

Finally, discussions pivot to the broader question of nurturing "patient capital" in the venture capital landscape. Insurance funds are identified as ideal sources for long-term capital investments. However, regulatory and systematic hurdles must be overcome to effectively harness these resources [para. 54]. Key industry voices, including Wu Qing of the NAFS, argue for bolstering policies that cultivate patient capital across diverse funding channels. Moreover, recent regulatory initiatives aim to expand pilot reforms for Asset Investment Companies, facilitating more active equity investment in the primary market [para. 59].

Evidently, resolving inherent structural deficiencies remains crucial for China to overcome its current "capital winter" in the primary market, with calls for systemic improvements in IPO processes and greater investment in promising tech sectors leading the discourse [para. 69].