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How to Restructure Chinese Supply Chains

China must reconfigure its industries and supply chains to meet the challenges posed by rising geopolitical tensions and rapid population aging. Private markets – including private-equity and venture-capital funds – can and must play a crucial role in this effort.

HONG KONG – “The old is dying and the new cannot be born,” the Italian Marxist theorist Antonio Gramsci wrote in the early twentieth century. We seem to be living in a similar interregnum today, likewise marked by “a great variety of morbid symptoms,” including, not least, the breakdown of global supply chains and the return of inflation. The only way forward is to support the development of new markets, industries, and institutions. But who will finance this effort?

In good times, characterized by rapid growth and fat margins, commercial banks and private markets could help emerging and efficient firms raise enough capital to acquire and restructure their inefficient and failing counterparts and create new supply chains. But tighter financial regulation after the 2008 global financial crisis, together with a prolonged period of low interest rates, has made mainstream financial institutions more cautious. They now prefer lower risks and shorter time horizons.

As a result, debt levels are at historic highs, and market concentration has increased substantially, with a handful of listed companies enjoying huge market share, particularly in the tech sector. At the same time, with public markets tightly regulated, those in search of higher yields are turning to less liquid, opaquer, and less regulated private markets. According to McKinsey’s Global Private Markets Review 2023, total private-market assets under management (AUM) reached $11.7 trillion in June 2022, having grown at an annual rate of nearly 20% since 2017.

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