On 8 November, Xinhua Finance forwarded the article ‘Empowering the “Stars of Tomorrow”: Bond Market Serves the Growth of Science and Innovation Enterprises’ from Financial Markets Research. The article is Yan Yan, Chairman of China Chengxin International and Vice Chairman of China Macroeconomic Forum (CMF), published in Financial Markets Research, Issue 11, 2024, ‘Bond Market Service for Financing of Science and Technology-Based Enterprises from the Perspective of the Whole Lifecycle’, and the following is the abstract of the article:
Yan Yan Chairman of China Chengxin International Credit Rating Company Limited, Vice Chairman of China Macroeconomic Forum (CMF)
‘ The article takes a full life cycle perspective and divides the financing journey of science and technology start-ups into three stages: start-up, growth and maturity. Each stage needs to be matched with different financial strategies.’
I. Introduction
Science and technology innovation enterprises are known as the ‘stars of tomorrow’, just like a rising star, they are glittering with future possibilities, but they are also eager to be ‘recharged’ and empowered by capital. The article ‘Bond Market Services for Financing of Science and Technology Innovation Enterprises from the Perspective of the Whole Life Cycle’ published in the November 2024 issue of Financial Markets Research reveals how the bond market can empower these ‘stars of tomorrow’ and cultivate new productive forces for the development of the economy.
II. The Financing Life Cycle of Science-Based Enterprises: Three Stages of Growth
Firstly, the article takes a full life cycle perspective and divides the financing journey of science and technology start-ups into three stages: start-up, growth and maturity. Each stage needs to match different financial strategies.
① Challenges and opportunities in the start-up period. Start-ups are difficult to obtain support from traditional financing channels because of higher risks and lack of collateral. In recent years, the bond market has achieved remarkable results in product innovation in key areas, innovating and launching products such as hybrid science and technology creation notes, which have enhanced the bond market's ability to support science and technology creation, green and inclusive.
② Expansion and demand during the growth period. In the growth period, science and innovation enterprises have a greater demand for capital, and need to invest a large amount of capital in technology research and development, manpower costs, new product promotion, production scale expansion, market expansion, etc., and are more looking forward to obtaining large-scale, medium- and long-term financing support.
(iii) Stability and innovation in maturity. Enterprises in the maturity stage, they need more funds to maintain and expand the existing achievements to cope with changes in market risks. Science and innovation enterprises in the maturity stage are more mature in technology, have certain brand advantages, have formed a more mature supply chain system, have a stable product market, and have entered a stable development stage.
Enterprises may experience different financing methods at different stages of development, and the choice of financing methods has its complexity and variability. From the indirect support mode mainly based on re-investment and re-lending, to the development of high-yield bond market, and from science and innovation pool-type bonds to innovative debt instruments such as dual-credit bonds and science and innovation bonds (notes), all of them can be regarded as the development space for the bond market to support the financing of science and innovation enterprises.
III. International experience and Chinese practice
Secondly, the article analyses the experiences of the US and Germany in bond market support for financing of science and innovation enterprises; and discusses the Chinese practice and explores the progress and challenges of China's bond market in serving science and innovation.
① Multi-level bond market in the United States. The multi-level bond market in the U.S. provides a variety of financing channels for science and innovation enterprises. In particular, the U.S. high-yield bond market, with its perfect issuance system, developed over-the-counter (OTC) trading, and sound risk management system, facilitates direct financing for science and innovation enterprises.
② Germany's policy financial institutions. The policy financial institutions in Germany, on the other hand, guide the flow of bond market funds to the science and technology sector through sub-lending and other forms. German science and technology enterprises have less direct financing through the bond market, and most of the small and medium-sized science and technology enterprises rely on the financial institutions to transfer loans to achieve the connection with the bond market.
③ Chinese practice: bond market and science and technology enterprises dance together. In recent years, China has introduced a number of supportive systems around strengthening the bond market's precise support and direct access to funds in the field of science and technology innovation, further enriching the innovative financial instruments for the direct financing of science and technology-based enterprises, expanding the channels for the direct financing of science and technology-based enterprises, and guiding the flow of more funds to the field of science and technology innovation. The authors point out that although China's bond market has introduced a variety of innovative tools, there are still problems such as the inconsistency of the identification standard of science and technology innovation, and the issuance structure needs to be optimised.
IV. Recommendations for bond market services for science and technology finance
Finally, the article puts forward a series of recommendations aimed at strengthening the bond market's ability to provide full-life-cycle financial services to science and innovation enterprises.
① Establish a sound bond financing support model for the whole life cycle. According to the characteristics and financing pain points of science and innovation enterprises at different stages, establish a sound full life cycle bond financing support model and build a multi-level bond financing service system.
② Accelerate the innovation of debt financing tools. In addition to the existing sci-tech bond varieties, we can consider strengthening the linkage between stocks and bonds according to the market demand, and increasing the market promotion of innovative varieties such as hybrid sci-tech notes, sci-tech bonds with conversion conditions, convertible sci-tech bonds, sci-tech bonds with warrants, sci-tech bonds with early redemption rights, and so on.
(iii) Improve the multi-credit enhancement mechanism and sound risk-sharing mechanism for science and innovation bonds. Credit enhancement mechanism is a key factor to reduce the issuance cost and increase the issuance success rate of science and innovation bonds, and improving the effectiveness of bond market services for science and innovation enterprises also requires further improvement of credit enhancement mechanism.
④ Strengthen credit rating and risk assessment services and enhance the effectiveness of credit rating services. Credit rating agencies, as an important reference for enterprises to issue bonds for financing, play an active role in serving the financing of science and innovation enterprises and promoting the precise flow of bond market funds into the field of science and innovation.
⑤ Deepen the construction of basic systems to create a favourable market environment. Improving the bond market's ability to provide financing services to science and innovation enterprises also requires further deepening the basic system construction and optimising the market environment for bond financing of science and innovation enterprises.
