Uncovering Key Facilitators and Barriers to the Expansion of Social Finance in China

Background and Purpose: Social finance is an emerging investment approach and a set of financial tools that leverages private capital to address poverty and inequality in middle-income countries like China. This approach expands and repurposes traditional models of funding for social programs beyond charitable and governmental funds, creating profits for investors and thus ensuring sustainability. Despite its rapid development in Europe and the United States, understanding the landscape of social finance in China is nascent. Current practices, challenges, and policies that could enhance its reach and effects in China remain largely unknown. This study aimed to bridge this knowledge gap by identifying the key facilitators and barriers of social finance in China through key informant interviews with service delivery organizations, investors, and policymakers within the social finance ecosystem.

Methods: Fourteen in-depth, semi-structured individual interviews were conducted from February to March 2023 with social finance experts in China to identify the variety of social finance tools, organizations, and their challenges. Participants were recruited via purposive sampling, including key informants from both domestic (n=6) and international (n=1) service delivery organizations facilitating social finance development, potential investor organizations (4 domestic, and 1 international), and one policymaker. Research participants, mostly male (64%, n=9), were interviewed in person (57%, n=8) or via videoconferencing. Each interview, facilitated by two research team members, lasted approximately one hour. Based upon these interviews, six cases that displayed the greatest heterogeneity and impact were purposively selected for in-depth analysis, covering areas such as poverty reduction, community development, and education; featuring various funding, including impact bonds, equity and debt direct investments with a concessional focus, and blended finance fund structures.

Findings: Overall, we found that China’s social finance sector is in its early stages, with equity investments being the most common type, particularly through foundations acquiring ownership stakes in social enterprises. Concessional debt and social impact bonds are rare. Most of the social enterprises in China are emergent and small, lacking national legal status,legitimacy and policy support,with unmet financial needs, especially for concessional debt. Foundations are the dominant investors but face legal barriers against lending and are discouraged from equity investments. Finally, the policy landscape reveals that regulatory policies and sectoral practices are fragmented and uncoordinated. There is a notable deficiency in mission-driven financial intermediaries and incubators to support social entrepreneurs. However, growth prospects seem positive, with stakeholders actively seeking solutions and a growing public recognition of the value in combining social impact with financial returns.

Conclusion and Implications: This study provides insights into key facilitators of social finance in China, including the presence of many social enterprises, supportive initiatives from governments, and a diverse pool of investors. However, barriers persist, such as the lack of legal recognition for social enterprises, regulatory barriers for foundations, and limited financial intermediaries and incubators. Addressing these barriers is essential for the anti-poverty and inequality reduction programs that rely upon social finance in China.