The Beijing Stock Exchange will support SMEs and innovation.
Photo by Kuang Da
By WANG Xin
Trading started on the Beijing Stock Exchange on November 15. Sixty of the first batch of 81 companies rose on opening, with all 10 IPOs up by more than 70 percent, triggering trading suspensions.
The other companies were transferred from the selected tier of the National Equities Exchange and Quotations (NEEQ), also known as the "New Third Board", an over-the-counter trading platform for companies that do not meet the listing requirements of Shanghai or Shenzhen. The new exchange - important to the ongoing reform - focuses on smaller innovation-driven companies.
YI Huiman, chairman of China Securities Regulatory Commission, called the launch a major innovation and hoped that the new exchange would make financing easier for small businesses and encourage innovation.
SMEs contribute to over 60 percent of China’s GDP and provide 80 percent of jobs. Small, innovation-driven companies are critical to China’s economic growth but do not always have easy access to capital. Nearly 60 percent of funding for US companies is raised through the sale of shares (equity financing) compared to only a quarter of companies in China.
The long-term nature of equity financing suits projects that require large, continuous investment in the early stages and take years to bear fruit. The new exchange is set up to incentivize equity financing for small companies by providing investors with higher returns and better risk management.
The Beijing Stock Exchange was born out of the NEEQ, which focuses on innovation. Compared to Shanghai’s STAR Board, NEEQ companies are much younger, smaller, and more specialized. Companies in the select tier of the NEEQ are now trading on the new exchange. Companies in the low tiers can trade on the new exchange if qualified.
The NEEQ has always been volatile and illiquid and has not always directed funding to where it needs to be.
“A lot of money went to the internet sector because it generated quick returns. High-tech, which is the real engine of growth, has not attracted nearly enough attention. The new stock exchange will change this,” said TIAN Xuan, Associate Dean and JD Capital Chair Professor of Finance at PBC School of Finance, Tsinghua University.
The listing rules favor companies with larger market caps and fast growth. There is no profitability requirement except for those with market caps below 200 million yuan (US$31.36 million). IPO reviews are fast and processes are streamlined. The exchange uses a hybrid of market-making and call auctions to combat illiquidity.
The Beijing Stock Exchange occupies space left vacant by Shanghai’s STAR and Shenzhen’s ChiNext boards. Companies trading on the STAR board are mostly high-tech businesses of strategic importance; ChiNext has a high concentration of startups and Beijing will support smaller players.
Current rules allow companies listed in Beijing for more than a year to move to Shanghai and Shenzhen, causing concerns about an exodus of high-performing companies. CHENG Xiaoming, a columnist and investor who is often referred to as the "godfather of the NEEQ", said the worry is overblown.
“It’s a misconception that A Share and the STAR Board consist of ‘big, good’ companies and that the NEEQ only has ‘small, bad’ ones. A better way to think about it is more mature companies with clearer valuations, while smaller and newer companies are harder to price” he said. “When small companies become bigger, they will be better served in Shanghai or Shenzhen.”
The new stock exchange is expected to generate close to 20 billion yuan for the industry. The more active the trading, the more willing companies will be to list there, meaning more business for banks.
“Every department, including prime brokerage, investment banking, trading and research, should be prepared,” said WANG Lei, managing director of China International Capital Corporation investment bank.
Boutique investment banks are especially excited. Many are unable to compete in Shanghai and Shenzhen. Individual investors must have at least 500,000 yuan in their accounts to trade, half of the 1-million-yuan threshold for the NEEQ. They can also access the market through mutual funds, which do not face minimum asset requirements. Some funds are already setting up Beijing-focused products.