How Do Chinese Firms Raise Capital?
The financial structure of firms may differ between developing and developed countries. The International Finance Corporation (IFC), the private sector investment arm of the World Bank Group found that internal finance ratios in developing countries are well below the levels of those in developed countries, that is, they rely more heavily on external sources. In China, state bank loans have been the most important source of financing for firms prior to the share system reforms and the opening of the stock exchanges. The preference for issuing equities as compared to other financing mechanisms can be attributed to a number of factors: policy constraints, cost of equity considerations, market impediments, and bias in the preferences of major shareholders who control the firm. The equity market stands out as an important source of financing for businesses since 1990. The capital-raising ability of the equity market has relied heavily on the performance of the secondary market.