China stakes much on new stock
board By Candy Zeng
SHENZHEN - The Chinese government looks
determined to press ahead with the launch of a
growth enterprise stock market devoted to listings
of small companies even as the country's main
stock markets show little sign of pulling out of
headlong plunges from last year's historic highs.
The proposed board, to be similar to
Nasdaq or the Hong Kong stock exchange's Growth
Enterprise Market, is regarded as a necessary part
of development of a fully fledged capital market
in China and an important potential booster of the
private sector. Perhaps as important and more
pressing, by attracting more funds from investors
it may help to mop up the country's excess
liquidity and support the government goal of
cooling the economy. Securities regulators
hope to open the growth market in the first
half
of the year, Shang Fulin, the chairman of the
China Securities Regulatory Commission said in
Beijing on December 17, 2007. Shenzhen Stock
Exchange - which is to host the new board - is
making every preparation to ensure the smooth
launch of the second board, the exchange's general
manager Zhang Yujun said in a recent meeting.
Analysts had high expectations for the new
board before the recent turbulence of the stock
market in line with global trends. The Shanghai
Composite Index, in spite of a brief recovery to
5,522 on January 14, has plunged about 27% since
the October 16, 2007, historic high of 6,124. It
touched 4,490 on Wednesday, the first trading day
after the Spring Festival holiday break.
The People's Daily, the Communist Party's
flagship newspaper, indicated on Wednesday that
the target of establishing the growth market
remains intact, with an editorial saying that it
was one of two major events expected this year by
the securities market, with the other the launch
of index futures. The timetable for that has yet
to be set, the editorial said.
''The
timely launch of the board will push forward
China’s economy and stock market,'' the People's
Daily said.
Lower thresholds The
growth board, which will have lower thresholds
than the main board, is intended to help small
start-ups, especially high-growth, high-tech
firms, to access funds. Companies in the service,
farming, energy and materials sectors are also
expected to take advantage of the new board.
According to the latest draft plan,
companies to be listed in the board shall have net
assets of not less than 20 million yuan (US$2.8
million) with accumulated revenue of no less than
10 million yuan in two consecutive years before
listing.
The draft regulation approved by
the State Council, China's cabinet, on August 22,
2007, lays legal foundation for the launch 10
years after an initial proposal calling for
further development of China’s venture capital was
submitted to the central government in 1998.
That proposal was shelved following the
burst of the global dot-com bubble in 2000 and the
bearish mainland A-share market at the time. In
2004, Shenzhen Stock Exchange launched a small and
medium-sized enterprise (SME) board as part of its
main board for companies to offer less than 100
million shares in their initial public offerings
(IPOs). By the end of 2007, nearly 200 companies
were listed, with total market capitalization of
883.6 billion yuan.
A source with the
Shenzhen bourse said a first batch of 100
enterprises will be listed in the proposed new
board and some 300 candidates are competing to be
in the first batch. The plan may be adjusted
according to demand in secondary market, he said.
It is expected in the industry that 500
companies will be listed in the first year and
that the number of listings will exceed that of
the main board (some 1,200) in two years. Wang
Shouren, general secretary of Shenzhen Venture
Capital Association, has previously said more than
1,000 enterprises intended to be listed in the
growth board.
The People's Daily
editorial, stating that the "stock market is the
barometer of the economy", argued that "the
fundamentals of China’s economy are still healthy.
Although the economy faces restructuring, its
internal momentum for long-term high-speed remains
unchanged. Even if China's economic growth slows
down a bit, its growth is still remarkable from a
global viewpoint. Such high-speed growth and
tendency should be the motive power to boost the
stock market. Moreover, from annual reports, an
absolute majority of listed companies recorded
remarkable growth in profits.''
The
country's state-owned enterprises posted a 31.6%
rise in 2007 total profits, according to the
Ministry of Finance, as the economy expanded
11.4%, the fifth consecutive year that GDP has
expanded 10% or more.
Slowing
growth China's economic growth, the fastest
last year among the world's major economies, may
slow to 10% this year, International Monetary Fund
managing director Dominique Strauss-Kahn said
Friday. The World Bank this month cut its forecast
for China's growth to 9.6%.
China is
trying to cool the economy as inflation stays
close to an 11-year high, even after interest
rates were raised six times last year. The
government has also steadily increased the minimum
reserve ratio of commercial banks to curb lending.
Allowing more companies to list shares should
drain off cash in a country where residents have
few places to park their savings other than banks,
real estate and stocks and give small companies
seeking funds an alternative to bank loans.
Increasingly affluent Chinese households,
which according to the People's Bank of China own
about half the country's more than 32 trillion
yuan in local and foreign-currency savings, are
enthusiastic share buyers, opening more than 25
million new accounts in the first half of last
year alone.
In southern Shenzhen, home to
the country's smaller stock exchange, director of
the municipal technology and information bureau
Liu Zhongpu said the bureau will enhance
communication with Shenzhen Stock Exchange, to
ensure early listing of local companies.
Liu said the exchange will set up a
database of listing company resources to include
100 high-growth enterprises and guide and
subsidize them for the listing. Shenzhen, part of
Guangdong province and a key part in the country's
rapid development over the past two decades, has
209,000 private enterprises or 70% of the total
business entities.
The bureau made a
"creative enterprise growth path scheme" in 2006
to help capitalization of private companies,
offering a total subsidy of 3.1 million yuan to
each company that is listed in the SME board. So
far, it helps 14 Shenzhen corporations listed on
the SME board, in addition to three in the US, one
in Britain and one in South Korea. The bureau last
week the names of five companies it will help to
list this year and which are believed will on this
occasion target the proposed growth board.
Shenzhen-based Chipsbank Microelectronics
Co, Ltd, the world's largest supplier of flash
memory controllers, in December said it aimed to
list on the growth board, only six months after
indicating plans to list on Nasdaq or in Hong
Kong.
"Investors in overseas markets such
as Nasdaq don't identity with pure Chinese IT
companies," Chipsbank president Zhang Hualong told
reporters. "The domestic capital market has been
leaping forward in the last two years and
[Chinese] investors will have passion for a local
company like us."
Analysts said other
high-tech companies will follow Chipsbank in
dropping plans to float overseas and opt instead
for the proposed growth board.
Broader
benefits That will bring other local
benefits, according to Huang Yun, general
secretary of Shenzhen Hi-Tech Industry
Association, citing development of the high-tech
industry in Shenzhen and the broader Pearl River
Delta, already host to clusters of high-tech
private companies.
More than 300 companies
in Shenzhen alone meet the proposed listing
requirement of the growth board, said Huang,
citing a survey by his association.
Ba
Shusong, a researcher with the State Council
Development Research Center, goes further,
predicting that a growth board would bring
fortunes of more than a hundred million yuan to
more than 10,000 business owners in the Pearl
Delta if all qualified enterprises in the area
were listed.
A bright future was also
forecast by Wei Wei, an analyst at Huafu Fund in
Shanghai. "We will have our own Google and Amazon
in China after the establishment of the growth
board. It will have a strong impetus on creative
companies thorough market mechanism."
Beyond Shenzhen, securities dealers such
as Zhejiang Securities and Changjiang Securities
are hunting out potential investment targets in
areas such as Chongqing and Zhejiang. In
Zhejiang,108 enterprises have submitted listing
plans including nine from Yongkang city involved
in industries such as auto accessories and
chemicals.
China's scores of high-tech
industry parks will also be a major source of
potential growth board companies. Zhongguancun
Science Park, the largest in Beijing, hosts more
than 700 enterprises whose annual revenue exceed
ten million yuan each, said Dai Wei, director of
the administrative office of the park in December.
Among the 40,000 enterprises in more than 50
high-tech industry parks, at least 3,000 have
annual revenue exceeding ten million yuan,
according to official data.
The growth
board will also encourage venture capitalists to
back more young companies as it will give them a
route to cash out from their investments. In
Shenzhen alone, 35 new venture capital companies
were set up in 2007.
Even so, enthusiasm
for the board may be limited in the short term,
said Ji Haitao of Shenzhen Capital Group.
"The launch of a domestic growth board
means a new exit channel for us but there are
other factors influencing the company's choice of
listing market," he said. "Before the Shenzhen
growth board is launched and accepted by
investors, we will mainly help growth enterprises
in overseas listings."
Amy Liu, manager of
another venture capital in Shenzhen, said the
lower threshold of the growth board also meant
higher risks for institutional investors. She
expects a general decline this year in the
price-earnings ratios of A shares and slower
economic growth in China, which might discourage
institutions from making bold investments in small
companies.
"It [the new board] is good
news for domestic growth enterprises," Liu said.
"As venture capitalists, we have to wait and see.
There are already many good overseas markets."
Candy Zeng is a freelance
journalist based in Shenzhen, China.
(Copyright 2008 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
