China IPOs & Lending: Capital Makes the World Go Round

The great capital drought is easing – in China at least. Today two major IPOs were announced (Kinetic Mines and People’s Insurance). (IPO stands for Initial Public Offering, meaning the first time a company offers shares to the public.) On the same day China Construction Bank said it will increase lending to small and medium enterprises. Finally the Bank of China reduced the amount of reserves bank must hold, freeing up additional capital for lending.

The taps are open again.

It seems lending by banks is counter-cyclical. When the economy was strong and businesses were growing, it was easy to get bank loans. Yet at the same time money was lent to projects that didn’t warrant the investment. This is the main issue facing Greece today. Low rate loans backed by a strong Euro made impossible financing projects possible. Eventually the impossibility of the project becomes apparent.

Then when business slows – so does access to capital. Banks refuse loans and shareholders won’t invest in shares. So IPOs dry up. And companies cannot access funds. That makes expansion difficult. It can also lead to cash flow crises and the closure of otherwise healthy businesses.

The free and fair flow of capital is what keeps any economy ticking. The announcement of high dollar IPOs and the opening of bank lending means businesses can expand, hire more people, make more products, buy more machinery – and keep the overall economy growing.

In a time of great uncertainty regarding the general economic climate, these are encouraging early signs.

 

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