Enhancing the financing capability of SMEs & family firms: the experience in China

By: The WFE Focus Team Mar 2018

At the recent WFE SME conference in Malta, Dr Zeng Bin, Researcher, Research Institute, Shenzhen Stock Exchange (SZSE) took part in a panel focused on the WFE report on listing family-run businesses. Here he writes about the experience of financing SMEs in China.

Corporate governance of listed family firms in SZSE

SZSE is home to a large number of family business issuers. The research group of SZSE conducted an independent research of SZSE-listed family firms based on the questionnaire provided by the WFE SME Working Group. During the WFE’s 2018 SME Conference in Malta, as the representative of the SZSE research group, I shared some key points of similarities and differences of the findings between our report and the WFE’s main report as following.

First of all, our research group sent a Chinese version of the questionnaires to 530 SZSE-listed companies. The criteria for the sample selection were: 1) listed before 2017, and 2) the de facto controller being a natural person or a family. The research group received 155 effective questionnaires from the listed companies, including 14 companies from the Main Board, 84 from the SME Board and 57 from the ChiNext Market.

The research defined family firms from the perspective of ownership rather than management. Respondents were asked whether they saw themselves as family businesses. The results showed that a majority of the sampled family firms were big in size with average market capitalisation of $1.5 billion and average revenue of $400 million.

The results also indicated that the ownership structure of SZSE-listed family firms was less concentrated compared with the results of the WFE’s main report. For SZSE sample companies, the average shareholding of the largest shareholder was 33.86%, while for the sampled companies in the WFE’s main report, it was 67%. Specifically, the average shareholding of the three largest shareholders of the sampled companies in the Main Board, SME Board and ChiNext Market were 48.16%, 50.69% and 51.35%. They were all slightly higher than the average percentage of all companies listed on the three boards respectively, indicating that SZSE-listed family firms tend to have a higher concentration on shareholding, and therefore have more control on the company than other non-family listed firms.

It is also common that the de facto controllers hold a post as the company’s Chairman or General Manager for the sample companies; only about 15% (18) of the sampled companies’ de facto controllers did not hold a post as the Chairman or General Manager.

For employing professional management team, the results of our report are consistent with the WFE’s main report. Over 50% of the family firms have hired external professional managers as company CEO.

We also found quite different results in the research of family firm succession. In the WFE report, 90% of the second generation and 20% of third generation had ownership stakes in the sample firms. On the other hand, in most SZSE-listed family firms the founders usually had ownership, and for nearly 40% of family firms, only the founders had ownership (instead of the sequencing generation). For family members’ participation in management, 32.61% of family firms had second generation members in their management team. Furthermore, a majority (70%) of de facto controllers of the sample family firms were aged between 50-70 years, so in the next 10 years, succession problems might become major concerns for these firms.

In the Shenzhen market, with regards to governance culture, we found that ‘value’, ‘long-term’ and ‘control’ were mentioned when describing family firms, indicating that the internal unity is the core of their governance culture.

Experience of enhancing financing of SMEs in China

In China, SMEs are also hungry for financing, because bank lending serves more than 90% of large enterprises but serves only less than 20% of SMEs. SZSE has made many efforts in helping local SMEs broaden their financing channels in various ways.

We have established intensive collaboration with government, financial institutions and other entities in helping SMEs, and built a service network that covers major regions in China.

In particular, in cooperation with MoST (Ministry of Science and Technology), SZSE established the V-Next Platform in 2014, which is a one-stop matchmaking and roadshow platform for tech SMEs, in order to provide comprehensive life-cycle financing and integrated services for these companies. Through online information display and an offline roadshow programme, these SMEs can have better access to broad-based institutional investors, including private equity and venture capital firms. All these services are free of charge for all participants.

In order to help SMEs (including family firm) get access to the exchange’s public platform, we also collaborate with local governments and intermediaries to solve the problems that SMEs usually encounter when applying for IPO. We organise training courses for Board members and senior executives of SMEs on a regular basis, inviting government officials, financial intermediaries, and industry experts as advisors for consultation, in order to help these SMEs improve their corporate governance and establish a more sound governance system.