Silicon Valley Bank helped finance China's innovation economy. What happens next?
Before it became infamous for the weaknesses on its balance sheet, Silicon Valley Bank (SVB) was known for the strength of its ties to the tech industry. So adept was SVB at serving the venture/startup ecosystem that it eventually took that expertise overseas.
The crown jewel of its global operations was China, where it served more than 2,000 clients and advised government regulators eager to make their banking system more innovation-friendly.
Read more
“We’re a model bank for China,” Dave Jones, a 23-year SVB veteran who served as chief credit officer before being dispatched to run the bank’s China operations, said in a 2019 interview.
“There have been times when [the Chinese government] has specifically referenced us” in regulatory documents, he added. Jones has since retired but remained on the board of SVB’s joint venture in China. He declined to be interviewed for this article.
What SVB offered in China was unique to a market where banks tend to be conservative small-business lenders. The Santa Clara, California-based bank was willing to make uncollateralized loans to unprofitable firms because it understood their businesses and funding sources.
Now, like their counterparts in the US, many of those Chinese clients are left weighing their options in the wake of SVB’s collapse, while Chinese regulators seek to minimize the damage from a mini-crisis not of their own making.
What SVB had in China
SVB’s main business in the Middle Kingdom—a standalone bank operated jointly since 2012 with Shanghai Pudong Development Bank (SPD)—had offices in Shanghai, Beijing, Shenzhen, and Hong Kong, and more than $2 billion in assets.
The 50-50 joint venture, known as SPD Silicon Valley Bank, or SSVB, continues to operate. Its client roster reads like a who’s who of young Chinese companies, including AI giant SenseTime and bike-sharing firm Mobike, focused mostly on the domestic market.
A separate wholly owned business provided advisory services, as well as offshore deposits and loans. It helped clients raise funds from overseas VCs and move that money between places like Grand Cayman, where SVB also had an office, and China.
It also had a reputation. As in the US, having a banking relationship with SVB was a badge of honor for many startups—validation of strong venture backing and bright prospects.
“They were pioneers in China’s banking sector,” said Jeffrey Wang, partner and co-head of the Shanghai office of BDA Partners, an investment banking advisory firm. “Startups wanted to bank with them.”
As Jones explained in that 2019 interview, many Chinese banks tried to compete with SSVB using “the same product offerings they would offer to a steel mill… What differentiates us is that we know how to service young companies.”
More than another bank failure
The Chinese government likes to trade market access for cutting-edge technologies and processes. In this case, officials were tutored by SVB on how to use banking to spark innovation on the home front.
Jones said in 2019 that he and his team met regularly with officials from the China Banking and Insurance Regulatory Commission (CBIRC), in an “indirect role,” to help build a framework for banks to better serve startups.
For example, SVB’s business model has long involved taking equity warrants in clients as a risk-management tool—something Chinese officials were reticent to allow. Eventually, a pilot program was approved. “We educated them,” Jones said. “That and the long and successful history we’ve had gave the regulators confidence it could be done here.”
SVB’s willingness to open its playbook to Chinese officials in turn opened doors to new business. “They were able to trade banking expertise for access to the market, a seat at the table, the ability to form a joint venture,” Jeff Chen, BDA’s Hong Kong-based head of technology in greater China, said this week.
Celebrity status in Shanghai
The relationship with the government helped fuel SVB’s growth and made Jones a minor celebrity. In 2018, he received Shanghai’s coveted Magnolia Award, given to ex-pats who have helped improve life in the city. (He regarded it as an award for his staff.)
It also gave SVB unique access to government leaders. In 2019, Jones helped arrange a private audience for CEO Greg Becker with Shenzhen’s Party secretary. “SVB’s legacy here will open any door,” Jones said then.
“The only person I think I would be unsuccessful trying to meet is Xi Jinping,” he added. “But I haven’t tried yet.”
What happens next for SSVB
Shanghai government officials and banking regulators met over the weekend, with speculation centered on SPD buying out SVB’s portion of the joint venture. A deal might be structured along the lines of what happened in the UK, where HSBC has purchased SVB’s local subsidiary for £1 ($1.21) and will inject $2.4 billion of capital into it. Another option for the China business could involve a foreign bank playing the role of white knight.
SSVB’s current president, Jade Lu, declined through a spokeswoman to comment. Most expect SSVB to survive as-is, albeit without some of the risk-taking flare instilled by SVB’s presence.
The fate of the wholly owned operations, which helped facilitate foreign investment, is murkier. SVB’s presence made some outside investors more comfortable doing business in China. In any case, losing an important capital conduit is rarely a good thing.
What the failure of SVB means for China
One big loser from SVB’s collapse could be China’s innovation economy. No other banks look ready to fill the void, and it’s possible that Beijing, seeing the failure’s destabilizing impact, could seek to reduce risks by reining in venture financing.
Reuters reports that The Securities Times, a state-owned Chinese newspaper, noted in an editorial this week that SVB’s failure would have “important implications for the development of China’s small- and medium-sized lenders, and the stability of China’s financial system.”
SPD, meanwhile, indicated in a statement that SSVB will continue on, saying a “sound corporate structure and an independently operated balance sheet” should insulate it from the bulk of the fallout. “As China’s first technology bank, SPD Silicon Valley Bank is committed to serving Chinese science and technology companies, and has always had sound operations in accordance with Chinese laws and regulations.”
Even so, Chinese borrowers can likely expect a more conservative, more traditional SSVB—“one that looks and acts more like the competition,” BDA’s Wang said.
It’s just one of the myriad consequences from SVB’s failure.
More from Quartz
The US will pilot a program to renew H-1B visas domestically
More than half of US nursing homes are unprofitable—and it's about to get a lot worse
Sign up for Quartz's Newsletter. For the latest news, Facebook, Twitter and Instagram.
