Economic reform in China began over 30 years ago. During these years of transition, the world has witnessed the country rise through rapid economic development, yet it now stands at another crossroad.
Today, a slowing global economy along with a widening income gap and pollution – just last weekend Beijing was reported as having “hazardous” levels of air pollution – are among the problems in the way of building a new dream – a prosperous, sustainable China. Tao Zhang, Yong Ge, and Ruxian Zhao, authors of a new report on impact investing in China, believe that impact investing is key to financing this dream.
The report, which is produced by China Impact Fund and New Ventures China, aims to study the role of impact investing in China with a particular focus on environmental small and medium enterprises (SMEs). It is the product of a collection of interviews with investors, entrepreneurs, and policymakers.
Why China needs impact investing
What’s true about traditional finance options not meeting the needs of social enterprises is true for China as well. Impact investing has found its place in the market to provide access to finance that they would not get from conventional investors.
Chinese environmental SMEs are underserved by commercial investors, yet the private sector – including SMEs – is better positioned than state-owned enterprises to undertake innovation that will decouple economic production and environmental quality, as well as promote inclusive growth.
Factors that contribute to this investment gap in China are perceived risk of the SME market, favoured lending to large state-owned enterprises, transaction costs, limited access to information about the growth patterns of SMEs, and the reliance on asset- or collateral-based lending, among others.
State of impact investing in China
Because of the many barriers, there is very few actual impact investing dollars to go around.
In fact, impact investing is a very new concept and a report by the Foundation for Youth Social Entrepreneurship on social enterprise in China identified only a few deals to date that were considered “impact investing”.
At the same time, there is an estimated potential market size of 25,000 environmentally-focused companies that may be appropriate for impact investment deals.
Recommendations for impact investing in China
Though impact investing in China is still very raw, the authors make suggestions for impact investors to pioneer. These are based on the three institutional challenges outlined by the Monitor Group: lack of efficient intermediation, lack of enabling infrastructure, and lack of sufficient absorptive capacity for capital.
They include a need for visionary leadership; building impact fund management teams that have a balanced mixture of impact- and investment-related experiences and skills; simple, measurable, and scalable impact assessment; practical legal solutions; marrying impact investing with capacity building; and aligning the investing mission with government goals.
“If this field of work can attract significantly more of China’s best and brightest, impact investing will not just change China – it will change the world,” said Wayne Silby, founder of Calvert Foundation.
To read the full report, visit http://www.cifund.cn/.
