Financing growth, investing sustainably

SHINE
How further innovation and collaboration could strengthen Shanghai's position as a leading global financial center.
SHINE


IN the century and a half since HSBC first opened its doors on the Bund, Shanghai has grown into one of the foremost international centers for trade and commerce.

As a consequence of Shanghai and China’s growth and development, requirements for finance are changing for both individuals and companies. Technological developments are revolutionizing how goods and services are produced, sold and distributed. Many traditional industries are being disrupted by challenger companies with cutting edge technology and new business models. Sending data is becoming as important as transporting cargo and transmitting funds. At the same time, as wealth grows and populations age across Asia and beyond, continued investment in infrastructure is critical. The nature of this infrastructure is evolving, along with the mechanisms for funding its construction.

Capitalizing on these trends would be a challenge for any financial center, but Shanghai’s inherent strengths mean it is uniquely well placed. The two recommendations below could help to add great value to the Chinese and global economies while securing Shanghai’s position as one of the pre-eminent global financial centers.

Equity for growth

A key constraining factor for the development of agile and innovative companies is the availability of funding at all stages of growth. In all economies, companies that are not yet large enough for public markets or private equity investors can find it difficult to raise capital, and are restricted in the amounts they can borrow. These smaller, faster-growing companies are particularly important contributors to employment and economic growth.

In the UK, HSBC has responded to this challenge through the creation of the Business Growth Fund (BGF), an investment company with 2.5 billion pound (US$3.26 billion) from five major banks to invest as equity in growing businesses. Individual investments are small, typically between 2 million pound and 10 million pound, to make it an efficient investor.

Importantly, this scale also lessens the potential impact from failures and, with multiple shareholders, the risks to individual banks are further reduced. As a result, under international and European rules, banks are permitted to make capital-efficient investments that boost the supply of growth capital in the economy. Investments so far of over 1.2 billion pound have been made in 200 firms across the UK. The idea has been taken up by banks in Canada, and a similar approach in Shanghai could help to support growth in this important sector of the economy.

Sustainable infrastructure

The delivery of appropriately financed, resilient and sustainable infrastructure will be vital to the long-term success of the Belt and Road Initiative and to continuing economic growth across Asia and beyond. The New Climate Economy, a flagship project of the Global Commission on the Economy and Climate, estimates that the world is expected to invest around US$90 trillion in infrastructure over the next 15 years, more than our entire current stock today.

As well as replacing ageing infrastructure in advanced economies, these investments are needed to accommodate higher growth and structural change in emerging markets and developing countries. As the Belt and Road Initiative is beginning to demonstrate, clean, efficient infrastructure provides the foundation for longer-term economic competitiveness, providing people with ready access to employment, markets, services and amenities.

Financing infrastructure at this scale will be challenging, especially given the long payback periods and the need to meet environmental and other standards, which may make these investments less attractive to some investors. Risk-sharing via “blended finance” is one area where the public sector can help make the most of limited resources, by mobilizing the private money needed to meet these ambitious targets.

There is an excellent opportunity for Shanghai to become a center for expertise in the new models of finance and investment that are required. It can bring together the public and private sectors with multilateral development banks and others, to provide long-term funding on a suitably massive scale.

The European Investment Bank’s “Private Finance for Energy Efficiency” initiative is a useful example of how the public sector can define the roles it can play in unlocking investment. Support provided to projects, companies and investors can include first-loss capital, project bundling, special purpose vehicles, guarantees, or “subsidizing to monetize.”

In Shanghai, further consideration could be given both to developing these new models of finance and to creating new institutional arrangements to deliver them. For example, future development could involve local guarantee companies and be structured like an Export Credit Agency, although focused specifically on sustainable finance for infrastructure.

Shanghai has an impressive record as a center for international trade, commerce and investment. This foundation can be used to build a hub of expertise and finance for fast-growing companies and sustainable infrastructure and thus to reinforce Shanghai’s position as one of the world’s foremost and important financial centers.




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