China to allow banks to directly invest in high-growth tech firms – sources

China is planning a pilot programme to allow selected commercial banks to set up equity investment arms to take direct stakes in technology firms, people familiar with the matter said, a move aimed at giving lenders a chance to buy into a high-growth industry while stoking competition with private equity players.

Under China’s commercial banking law, banks are forbidden from directly investing in equities of non-bank institutions, unless otherwise stated by the government.

The pilot programme, dubbed an “investment and loan linkage mechanism”, is set to start sometime this year via special approval by the State Council, China’s cabinet, a government official with direct knowledge of the plans said. The official was not authorised to talk to the media and requested anonymity.

Details of which banks will qualify to take part in the pilot scheme, and under what conditions, have yet to be hammered out, the official and three senior bankers said, but China’s banking regulator has identified the effort as a major task for 2016.

The bankers declined to be identified because they were not authorised to talk to the media.

The China Banking Regulatory Commission (CBRC) did not respond to a faxed request for comment.

The move is intended to channel more financial support to China’s high-flying tech sector, a traditional hunting ground of private equity, venture capital and foreign investment banks.

“If these rule changes bring more capital to the market, its going to create more competition and put more pressure on returns for all investors,” said Bain & Co partner Vinit Bhatia.

While China’s broader growth prospects have cooled, its tech sector remains in demand. Investments in telecommunications, media and technology totalled $14.1 billion in China in the first half of 2015, surpassing the $13.3 billion invested during the whole of 2014, according to Bain & Co.

With an eye on the Silicon Valley model, Chinese commercial bankers told Reuters that while sometimes risky, tech start-ups can make for lucrative business if lenders are allowed to not only lend, but also take ownership in those firms.