Micro Connect unveils new market standard for financing China’s micro and small businesses

Micro Connect, an investment platform co-founded by the former boss of Hong Kong Exchanges and Clearing, Charles Li Xiaojia, on Tuesday introduced a new market standard for financing China’s micro and small businesses.

The market-accepted protocol, or MAP, will allow investors to value expected cash flows and the corresponding risks of daily revenue obligations (DRO), a new asset class that allows contract owners to gain a fraction of a business’s revenue for a fixed period of time, in effect buying the right to future income.

DROs are traded on the Micro Connect Macau Financial Assets Exchange (MCEX), launched in March 2023 and the first licensed global exchange for DROs. The MAP is also expected to help listed businesses identify an optimal revenue-sharing ratio and contract period to secure funding.

The new metric – a price-to-net contract payout ratio – will help investors evaluate the market value of DROs based on expected future cash flows.

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“I think this MAP will, in so many ways, revolutionise disclosure. We’re doing daily, we’re doing it on every single contract, on every single shop, and we’re tracking your cash flow,” said Li at a launch event in Hong Kong. “I don’t really think there’s ever going to be another disclosure system that is so granular … and so transparent.”

Micro Connect said the MAP is a guide that will help develop an ecosystem and broader participation from a diverse set of global investors, micro and small businesses, and market intermediaries.

As of the end of last year, institutional investors on MCEX invested close to 4 billion yuan (US$559 million) in more than 10,000 bricks-and-mortar stores in 270 cities in China, according to the exchange’s website. The businesses range across food and beverages, retail, services, and the culture and sports sectors.

Businesses are able to raise long-term capital by listing on MCEX, which trades on revenue shares rather than stocks and bonds on traditional bourses. Institutional investors buy DROs, which fund China’s micro and small businesses, in exchange for part of their daily revenue.

The exchange has more than 50 investor members, including banks, securities companies, asset management and wealth management companies, venture capital and private equity firms, and hedge funds.

Micro Connect, launched in August 2021 by Li and financier Gary Zhang, provides vital funding to small Chinese businesses that do not have access to traditional bank lending to expand. The potential universe of small, medium and micro enterprises in mainland China reached 52 million as of the end of 2022, according to central government data.

Micro Connect’s development has been aided by the mainland’s widely-digitised payment systems, which allow data on revenue to be shared. However, Micro Connect is eyeing expansion in other markets, including Hong Kong and Macau, and could move into some Southeast Asian countries.

Micro Connect is increasingly working with landlords and commercial property operators, who have either built digital controls over their tenants’ revenue streams, or can be easily incentivised to establish such controls, to secure financing.