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How Private Enterprises Borrow Financing Tools

Source:CICCPS Release time:2019/9/3 10:40:57 
The latest World Economic Outlook report issued by the International Monetary Fund (IMF) has lowered its global economic growth forecast to 3.2% this year. China's recently released "Economic Daily - China Postal Savings Bank Small and Micro Enterprise Operational Index" shows that July was 45.9, down 0.2 percentage points from last month, the lowest since December 2016. Among them, the cost index rose by 0.3 points and the financing index fell by 0.1 points. This indicates that global economic growth is confusing, downside risks are increasing, and it is difficult to reverse in the short term. This is undoubtedly worse for the private enterprises which are experiencing "growing troubles", and the difficulty of financing is more prominent. Faced with the current situation, we should not only explore new financing tools, but also refine traditional financing tools, especially focusing on debt-to-equity swap, mortgage financing and corporate bonds to "improve quality and efficiency", so as to effectively dock the financing facilities of private enterprises and promote the high-quality development of private enterprises.

In reality, many private enterprises are living in the supply chain ecosystem dominated by the core large enterprises. Normally, the credit relationship between the upstream and downstream enterprises maintained by the "supply chain" is very firm and stable, but once there is an unoptimistic expectation of future economic growth, the core enterprises may rely on it. Strength forces downstream private enterprises to accept favorable credit payment conditions, which results in private enterprises "depositing" part of their funds on accounts receivable. The implementation of debt-to-equity swap is actually to transform the creditor's right-to-debt relationship between private enterprises and core enterprises into equity shareholder relationship. It can alleviate the pressure of ecological debt in supply chain, reduce leverage ratio, optimize capital structure, strengthen the "supply chain", enhance the voice and control power of private enterprises, and establish capital as a link and industry as a whole. The core industrial cluster supply chain ecosystem will have a far-reaching impact.

For the banking system, as a credit risk mitigation tool endorsed by collateral, mortgage only relieves the "security" risk, while the "liquidity" risk remains the same. In other words, as long as the risk of the banking system has not been fully mitigated, they will not be able to actively carry out mortgage business. Unless the liquidity is relatively abundant and the interest rate (risk compensation tool) is free and flexible, only the "liquidity" risk mitigation tool will be introduced.

In practice, the ideal "liquidity" risk mitigation tool is the mortgage guarantee insurance provided by non-insurance institutions. The basic principle of Mortgage Guarantee Insurance is that once the risk of loan recovery occurs, the risk of loan is assumed by the insurance institutions to ensure the smooth return of the mortgage loan to the banking system as scheduled. At the same time, the liability for the disposal and liquidation of the mortgage is transferred to the insurance institutions. In foreign countries, many large insurance companies, such as AIG, have carried out mortgage guarantee insurance business. In China, in recent years, this kind of business has also been tentatively carried out in a small scale, such as the Sunshine Property Insurance Personal Housing Mortgage Operation Loan Guarantee Insurance approved in May 2018, which belongs to this kind of business.

From the international experience, providing risk compensation mechanism is the common practice of "government + insurance" to assist private enterprises in financing relief. For example, the Singapore government purchases loan insurance and pays 90% of the premium for the financial institutions providing loans. In our country, "government + insurance" should adopt the mode of risk compensation fund pool, that is, insurance institutions provide private enterprise bond financing support tools by commercial means (collecting premiums), and bond risk should be borne by insurance institutions in full. If there are operating losses (private enterprise bond financing support tool part), the loss part will be compensated by the risk compensation fund pool established by the government according to the pre-agreed proportion; if there are profits, the profit part will be injected into the fund pool by the insurance institution according to the pre-agreed proportion and used for turnover.
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