


































Advances in Politics and Economics
ISSN 2576-1382 (Print) ISSN 2576-1390 (Online)

Vol. 8, No. 1, 2025
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125

Original Paper

Rethinking the Development of Science and Technology

Finance in China
Xin Dong1

1 The University of Shanghai For Science And Technology, Shanghai, China

Received: August 29, 2025 Accepted: October 11, 2025 Online Published: October 25, 2025

doi:10.22158/ape.v8n1p125 URL: http://dx.doi.org/10.22158/ape.v8n1p125

Abstract

Technological innovation and financial development are mutually reinforcing.The financial system

alleviates the financing constraints faced by technological innovation by providing services such as

information incentives, risk management, and intertemporal resource allocation. This paper first

reviews the interactive relationship between technological progress and financial innovation during

the three industrial revolutions, clarifying the connotation and functional positioning of science and

technology finance. Subsequently, by analyzing the structural characteristics of China’s financial

system, it points out the limitations of the government-dominated credit system and bank-dominated

financing structure in supporting technological innovation. Finally, it proposes policy

recommendations for improving China’s science and technology finance system, including unblocking

the circulation bottlenecks between science, technology, and finance, enriching the ecosystem of

science and technology finance supply, and establishing a national-level science and technology

finance support institution.

Keywords

Science and technology finance, Financial system, Technological innovation

1. Introduction

After more than four decades of reform and opening up, the sustainability of China’s economic growth

increasingly relies on technological innovation capabilities.Innovation-driven development has become

an inevitable choice for economic development patterns. Technological innovation cannot be separated

from financial support. A stable and efficient financial system can effectively respond to the financing

constraints faced by technological innovation and promote its stable and sustainable development by

providing services such as information production, incentive mechanisms, risk management, and

intertemporal allocation.



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Throughout human history, each industrial revolution has begun with a technological leap,

subsequently driving changes in commercial organizational forms, posing new demands for capital, and

promoting reforms in the financial sector. Financial innovation, in turn, acts as a catalyst for

commercial and technological progress.

As technological iterations become more frequent, the demand for financial innovation from

technological progress continues to increase, and the interactive model between the two is constantly

evolving. Against this backdrop, in-depth research on the development patterns of science and

technology finance and the design of policy systems tailored to China’s national conditions are of great

significance for promoting an innovation-driven development strategy.

2. Evolution of Financial Innovation During the Three Industrial Revolutions

2.1 The First Industrial Revolution (18th Century 60s to Mid-19th Century)

With the widespread application of the steam engine, societal productivity underwent a breakthrough

transformation, making large-scale production possible and significantly increasing capital demand.

To meet the urgent funding needs of industrial expansion, the modern banking system gradually

emerged. The Bank of England was established in 1694. By 1825, the number of banks in Britain

exceeded 700, basically achieving the effective conversion of household savings into industrial capital.

In 1817, the New York Stock Exchange Committee (now the New York Stock Exchange) was

established, and the emergence of railway stocks around 1830 marked the initial formation of the early

capital market.

The most representative financial innovation during this period was the formation and operation of

commercial bank credit mechanisms.

Banks absorbed idle social funds and provided long-term financing support for emerging industries

such as textiles, steel, and railways, playing a key role in promoting enterprise expansion and industrial

development. Although the stock market was still in its infancy, it began to function as a channel for

supplementing enterprise long-term capital.

2.2 The Second Industrial Revolution (19th Century 60s to Early 20th Century)

The widespread application of electricity drove industry further towards intensification and

organization, leading to the emergence of large-scale monopolistic organizations such as cartels and

syndicates, and deepening enterprises’ reliance on financial resources. Financial innovation during this

period focused on the rise of investment banks.On the one hand, with the rapid development of

capital-intensive industries such as railways, manufacturing, and mining, commercial bank credit

struggled to meet their enormous financing needs, and enterprises increasingly turned to issuing stocks

and bonds to expand their funding sources, driving demand for securities underwriting services. On the

other hand, commercial banks were unable to meet the demands of numerous mergers and acquisitions;

from 1895 to 1904, the United States experienced its first merger wave, with a significant trend of

integration between industrial capital and financial assets. The emergence of investment banks,



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specializing in securities underwriting, corporate mergers and acquisitions, and project financing, filled

the gap in commercial bank services in the capital market, significantly enhancing the financial

system’s ability to support the real economy and promoting the increasing maturity of the capital

market.

2.3 The Third Industrial Revolution (Mid- to Late 20th Century)

The new round of technological revolution, represented by atomic energy, electronic computers,

aerospace technology, and biotechnology, profoundly changed social production methods and

economic organizational forms.Simultaneously, the rapid development of information and

communication technologies accelerated the globalization of economic activities, leading to structural

changes in the financial system.Financial innovation during this period was mainly reflected in two

aspects: First, the internationalization process of financial services accelerated. The rapid expansion of

multinational corporations and sustained growth in global trade posed higher requirements for

cross-border capital allocation and risk management. The establishment of multilateral economic and

trade organizations such as the International Monetary Fund, World Bank, and World Trade

Organization provided an institutional basis for a global financial coordination and support system.

Second, the venture capital mechanism gradually took shape. Rapidly growing technology enterprises

became important drivers of economic growth, but traditional financing models struggled to adapt to

their high-risk and highly uncertain characteristics. Therefore, governments around the world

successively established small business investment companies, introduced venture capital funds (such

as Sequoia Capital), and promoted the construction of a multi-level capital market system (such as

NASDAQ), effectively promoting the commercialization and industrialization of technological

achievements and providing crucial financial support for the formation of technological innovation

clusters.

3. Connotation and Functional Positioning of Science and Technology Finance

The development of technology financing often lags behind enterprise and societal needs. On the one

hand, technological achievements possess characteristics such as specificity, dependency, virtuality,

monopoly, spillover, timeliness, and optionality, making them difficult to scientifically measure and

trade. On the other hand, technology enterprises are characterized by intangible asset lightness, high

risk, information asymmetry, small scale, and high growth potential, leading to severe market failures

in their financing.

Science and technology finance is a systematic and innovative arrangement of various financial tools,

institutions, policies, and services aimed at promoting technology development, achievement

transformation, and high-tech industry development. Governments, enterprises, markets, social

intermediary organizations, and other entities provide financial support in the technological innovation

financing process, making it an important component of the national technological innovation system

and financial system. Science and technology finance is the organic integration of “the primary



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productive force” and “the primary driving force”, embodying the fusion of technological and financial

innovation. The main functions of science and technology finance are reflected in the following

aspects:

Resource Allocation Function:

From a macro perspective, science and technology finance must provide an effective resource

allocation mechanism for society, optimizing social output and welfare with limited resources.Society

needs to direct resources towards the technology sector and the real economy to prevent excessive

economic virtualization. China’s economic development once relied excessively on infrastructure

construction and real estate investment, which not only caused overcapacity to a certain extent but also

triggered an economic virtualization tendency, insufficiently supporting consumption and innovation.

This phenomenon indicates that there is still room for improvement in China’s macro-level resource

allocation efficiency. Resource allocation efficiency is the result of the combined effects of market

mechanisms, government intervention, and institutional environments.

Information Production Function:

From a micro perspective, science and technology finance first needs to address the issue of

information asymmetry.Information asymmetry refers to a situation where transaction parties (such as

borrowers and lenders) possess different quantities or qualities of information, leading one party to

potentially exploit its information advantage to harm the other party’s interests, thereby distorting

resource allocation, reducing market efficiency, hindering transaction completion, and even triggering

systemic risks. Information production is an important means to address information asymmetry, but

this is not the responsibility of a single financial institution; it requires collaboration from all parties in

society to establish a cooperative mechanism among banks, equity investment institutions, guarantee

institutions, the government, and technology enterprises, forming an information-sharing pattern and

reducing transaction costs.

Incentive and Constraint Function:

Moral hazard is one of the core issues in the financial system. The existence of moral hazard distorts

market incentive mechanisms, leading to resource misallocation and increasing systemic risks. Science

and technology finance needs to form reasonable incentive mechanisms through scientific contract

design, strict market discipline, necessary financial regulation, and even cutting-edge technological

means to overcome moral hazard. For example, various forms of financial contracts and tools can

alleviate and reduce adverse selection and moral hazard, such as the company control market formed

by equity capital and bonds in direct financing, debt constraints in indirect financing, and common

betting agreements in venture capital that incentivize entrepreneurs while guarding against moral

hazard.

Risk Management Function:

The process of technological innovation and achievement transformation is highly uncertain, and

science and technology finance must achieve effective risk management. Risk management aims to



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identify, assess, control, and transfer potential risks during the investment process, optimizing the

risk-return balance of relevant parties. Science and technology finance needs to optimize the risk-return

structure through financial innovation, developing a multi-level risk-sharing system and diversified risk

management tools. Only in this way can the extremely high risks of technological innovation be

effectively shared, attracting more capital to participate in technological innovation.

Value Enhancement Function:

Science and technology finance needs to provide value-added services for start-up enterprises and

technological innovation.Science and technology finance should not only meet the funding needs of

technological innovation but also possess strategic vision, resource integration capabilities, and value

creation wisdom, emphasizing intellectual empowerment, network effects, and long-term value

orientation behind capital. In addition to providing funds, various financial institutions should also

assist technology entrepreneurial teams in team building, governance structure design, market

development, and marketing network construction. Venture capital and private equity institutions play

important roles in this regard, as they can efficiently identify opportunities, avoid risks, and achieve

excess returns through active management.

4. Characteristics of China’s Financial System and the Current State of Science and Technology

Finance Development

4.1 Structural Characteristics of China’s Financial System

Driven by deepening reforms and financial openness, China’s financial system has initially formed a

multi-level, multi-entity, and multi-tool development pattern, but it still exhibits two core

characteristics overall:

Government-Dominated Credit System:

China’s credit system is centered around government credit, while market-based credit mechanisms are

relatively weak. The government not only serves as a regulator but also directly participates in market

credit allocation through implicit guarantees for state-owned enterprises, credit endorsements for major

projects, and approval-based listing review arrangements, substantially influencing market credit

assessment and risk pricing. This model was beneficial in mobilizing social resources and

concentrating efforts to support infrastructure and key industry construction during the early stages of

economic development. However, it has also led to excessive bank capital flowing towards

government-dominated projects and state-owned enterprises, resulting in inefficient allocation and

insufficient financial support for small and medium-sized enterprises (SMEs) and the private economy,

with prominent resource misallocation issues.

Bank-Dominated Financing Structure

China’s current financing system is still dominated by bank credit-based indirect financing, while the

direct financing system remains immature.From the perspective of financing structure, bank loans

account for approximately 80% of external financing for non-financial enterprises, indicating limited



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functionality of the capital market in serving the real economy. Although the stock market has made

progress in institutional construction and market size, it primarily served state-owned enterprise

reforms for a long time. Government intervention in the secondary market has created expectations of a

“policy-driven market”, leading to irrational behaviors such as “speculating on policies” and hindering

effective support for front-end technological innovation. The bond market has developed relatively

slowly, and the long-standing expectation of guaranteed repayment has affected the bond market’s risk

pricing function.

4.2 Structural Limitations in Supporting Technological Innovation

China’s existing financial system faces multiple constraints in supporting technological innovation:

Mismatch Between Risk Appetite and Innovation Needs

Under the government-dominated credit mechanism, the risks of various financing entities are mostly

covered by government credit guarantees or collateral.The capital market lacks a benign interaction

between liquidity and risk. Investors generally prefer low-risk or risk-free assets and tend to support

projects with “implicit guarantees”, with a pervasive “rigid payment” mentality in the market. However,

technological innovation projects generally possess high-risk and highly uncertain characteristics.

Existing financial institutions lack the ability and incentive to identify, assess, and bear such risks,

leading to difficulties in effectively channeling funds into the technology sector.

Relatively Simple Financing Instrument System

The bank-dominated system, centered on debt financing, focuses on traditional models such as fixed

income and collateral guarantees, which are incompatible with the financing characteristics of

technology enterprises, which are characterized by “light assets, weak collateral, and long cycles”.

Credit products are still mainly traditional working capital loans, lacking customized financial tools

tailored to the long research and development cycles of technology enterprises. The popularity of new

tools such as equity investment, convertible bonds, and intellectual property securitization remains low.

An effective cooperation mechanism between banks and venture capital institutions has not been

established, making it difficult to match investment and credit cycles and inhibiting banks’ enthusiasm

for participating in early-stage technology investments.

Insufficient Capability of the Capital Market to Support Technological Innovation

Although China’s capital market has continuously improved in terms of scale and institutional

construction, a multi-level capital market system oriented towards technological innovation is still

underdeveloped. The financial system provides weak support for the front end of technological

innovation. Financial institutions are unwilling to undertake high-risk projects with uncertain

technological paths and provide insufficient financial support for the concept verification and pilot

testing stages. Financial institutions still mainly rely on traditional financial indicators to evaluate

technology enterprises, making it difficult to quantify technological value and hindering small

technology enterprises from obtaining loans. Platforms such as the Science and Technology Innovation

Board and NEEQ are still in their early stages, with market liquidity, exit mechanisms, and risk pricing



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capabilities needing improvement, limiting the ability of technology enterprises to configure resources

through direct financing. The construction of the science and technology finance ecosystem lags behind,

lacking an integrated collaborative platform for multiple entities such as venture capital, investment

banks, commercial banks, insurance institutions, and guarantee institutions. The services provided by

various institutions are fragmented and difficult to form a closed loop.

Inadequate Risk-Sharing and Management Mechanisms

Financial institutions lack the ability to effectively identify and price technological risks and market

risks, as well as effective risk mitigation tools.In some cutting-edge technological fields, due to a lack

of sufficient data, it is difficult to develop corresponding insurance products. Policy tools such as fiscal

subsidies and guarantees have not formed effective linkage with market-based venture capital. The

failure risks of technology projects are almost entirely borne by financial institutions, lacking a

multi-party collaborative risk-sharing mechanism involving the government, insurance, guarantees, and

guide funds. This leads financial institutions to tend to avoid rather than support technology-based

enterprises when facing them, constraining the sustainable development of the science and technology

finance service system.

5. Basic Principles of Designing Tech-Finance Policies

5.1 Basic Principles of Policy Design

Adhering to Market-Oriented Principles

Government support policies and measures must respect market laws and achieve policy goals through

the combined efforts of government support and market mechanisms. It is essential to leverage the

decisive role of the market in resource allocation, guiding financial resources toward high-potential

tech sectors through price signals. Meanwhile, the government should “act where necessary and refrain

where not,” intervening in areas where market failures occur, such as basic research and early-stage

projects, to prevent resource misallocation and moral hazards caused by excessive policy intervention.

Maintaining Fair Competition

Maintaining fair market competition is crucial for optimizing the business environment and stimulating

innovation vitality. Government intervention should focus on creating a level playing field, ensuring

transparency in policy formulation and execution, reducing information asymmetry and rent-seeking

opportunities, and ensuring equal access to resources and participation in competition for all market

entities, avoiding policy biases or hidden barriers. It is also important to balance efficiency and fairness,

strengthen intellectual property protection, break administrative monopolies and local protectionism,

and prevent excessive competition or monopolies from stifling innovation.

Promoting Equal Opportunities

Tech-finance policy design should lower support thresholds and steadily increase support intensity to

promote social equity and inclusive economic growth. It should create a relaxed and regulated

institutional environment to enhance the success rate of entrepreneurial innovation among small and



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medium-sized tech enterprises. Simultaneously, regional disparities should be considered to increase

development opportunities for small and medium-sized tech enterprises in underdeveloped regions and

promote balanced regional technological innovation.

Focusing on Sustainable Development

Sustainable development should be ensured by guaranteeing the commercial viability of financial

institutions in supporting technological innovation, providing sufficient innovation incentives for tech

innovators to foster a positive interaction between finance and technology, and ensuring the

government’s financial sustainability. This involves continuously improving the endogenous

mechanisms of management and services to ensure that the long-term direct and indirect benefits of

policy-based finance or other forms of fiscal support can cover related costs.

5.2 Urgent Issues in Current Tech-Finance Policies

Currently, while China’s tech-finance sector is developing rapidly, it still faces a series of issues that

require government-level coordination. Firstly, there is a lack of effective linkage between government

fiscal tools and market-based financial instruments, with inadequate institutional mechanisms for

collaborative support of technological innovation. Policy funds and social capital struggle to form

synergies in resource allocation. Secondly, information asymmetry is prevalent among tech enterprises,

with the professionalism and uncertainty of their R&D activities increasing the difficulty for financial

institutions to identify risks and hindering the effective flow of funds. Thirdly, the entrepreneurial

integrity constraint mechanism is relatively weak, with inadequate credit evaluation systems and

integrity education mechanisms, increasing the moral hazards associated with financial support.

Fourthly, against the backdrop of an imperfect exit mechanism, venture capital faces incentive

imbalances and adverse selection issues while pursuing high returns. Especially in the “user-centric”

internet ecosystem, some enterprises prioritize short-term user growth over long-term benefits, giving

rise to new moral hazards. Fifthly, with increasingly fierce market competition and a shortened overall

enterprise lifecycle, financial support faces higher uncertainty and timeliness pressures, demanding

greater professionalization and refinement in tech-finance services.

6. Policy Recommendations for Improving China’s Tech-Finance System

6.1 Unblocking the Circulation Between Technology and Finance

There are still certain obstacles in the circulation mechanism between technology and finance,

necessitating institutional-level unblocking and optimization. On one hand, indirect financing methods

dominated by bank credit have limitations in supporting the early-stage development of tech enterprises,

particularly in meeting the financing needs of high-risk, asset-light projects. The function of direct

financing has not been fully leveraged, and the channels for tech innovation enterprises to access

capital markets need to be broadened. On the other hand, the motivation and capacity of financial

institutions to support technological innovation need to be strengthened, especially in terms of

professional services, resource integration, and project identification by key entities such as investment



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banks and venture capital firms. Additionally, there is room for further optimization of the performance

evaluation mechanism for policy-based tech-finance. The existing evaluation mechanism, to some

extent, reinforces risk aversion tendencies, which is not conducive to government-backed financial

institutions participating in high-uncertainty tech innovation projects. In the future, it is necessary to

promote the establishment of a more scientific and reasonable evaluation system that incentivizes

financial institutions to reasonably undertake innovation risks while preventing moral hazards,

gradually enhancing the circulation efficiency between technology and finance.

6.2 Enriching the Tech-Finance Supply Ecosystem

Under the current financial service system, tech enterprises face practical issues such as limited

financing channels and mismatched product tools, necessitating improvements from the supply side.

Various financial institutions, including banks, insurance companies, funds, and securities firms, can

further focus their efforts on the key challenges faced by tech enterprises in their development,

precisely targeting product design and service models to enhance service precision and effectiveness.

Specifically, firstly, a more diversified tech-finance market system can be promoted, such as the

Science and Technology Innovation Board and university financial markets, to provide differentiated

financing tools for tech enterprises at different stages and of various types. Secondly, the organizational

models of financial institutions can be optimized to adapt to the characteristics of tech enterprises, such

as establishing tech branches, tech insurance subsidiaries, and professional venture capital platforms, to

enhance their understanding and responsiveness to tech projects. Thirdly, in terms of risk protection,

more professional insurance products targeting specific industries and technological directions (e.g.,

biotechnology, artificial intelligence, and new energy) need to be explored to reduce the uncertainty of

enterprise financing and operations through risk compensation and reinsurance mechanisms.

Strengthening incentives and support for these innovative services in terms of institutional construction

will help enhance the adaptability and inclusiveness of the financial system to technological innovation.

6.3 Strengthening the Tech-Finance Support Institution System

In the process of promoting the improvement of the tech-finance system, some policy-based support

institutions can play an active role in filling market gaps and guiding social capital. Firstly, a

specialized national-level tech bank can be considered to provide low-interest or interest-free loans to

small and medium-sized tech enterprises and key innovation projects, while also undertaking public

financial functions to provide necessary support for credit reporting systems, intellectual property

evaluation systems, etc., and enhance the overall level of financial infrastructure. Secondly, a

national-level reinsurance mechanism can be constructed to disperse the systemic risks faced by tech

enterprises in terms of technology, market, and talent, alleviating the risk concerns of financial

institutions during capital deployment. Especially in specific regions or industries, risk matching

mechanisms can be utilized to mitigate resource misallocation caused by risk homogeneity. Thirdly, a

national-level strategic investment fund can be established, adopting a master fund operation model and

focusing on strategic emerging industries. This will not only enhance the supply of long-term capital



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but also serve as a demonstration and driving force for local guidance funds, gradually forming a

benign structure where policy guidance and market mechanisms work in tandem.

7. Conclusion

Tech-finance is an eternal theme in the financial sector. The development of new quality productive

forces requires continuous transformation of the financial system. Tech-finance is not merely a

financial issue but a transformation of the entire societal resource allocation mechanism, involving

institutional improvements and cultural construction across multiple dimensions, including laws and

regulations, fiscal and tax policies, monetary policies, organizational structures, education systems, and

the application of digital technologies.

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	1. Introduction
	4.1 Structural Characteristics of China’s Financia
	4.2 Structural Limitations in Supporting Technolog
	5. Basic Principles of Designing Tech-Finance Poli
	5.1 Basic Principles of Policy Design
	5.2 Urgent Issues in Current Tech-Finance Policies

	6.Policy Recommendations for Improving China’s Tech-
	6.1 Unblocking the Circulation Between Technology 
	6.2 Enriching the Tech-Finance Supply Ecosystem
	6.3 Strengthening the Tech-Finance Support Institu



	References

