Innovative SMEs are to expect a new opportunity to access capital in China. What do we know about that?
In early September, President Xi Jinping announced the government’s intention to launch a new stock exchange in Beijing. It would serve small and medium-sized enterprises (SMEs), primarily those oriented to innovation and cutting-edge technologies.
Currently, two exchanges operate in mainland China.
- Shanghai Stock Exchange – the biggest exchange in Asia, 3rd largest exchange in the world by market cap, serves high-profile businesses and former state-run companies, like major commercial banks and insurance companies
- Shenzhen Stock Exchange – a smaller exchange targeting smaller and emerging-sector companies, is among the top 10 world’s largest exchanges
There’s also an exchange in Hong Kong. It is officially called HKEX – Hong Kong Exchanges and Clearing Market. HKEX is the world’s leading IPO market and one of the world’s largest bourses in terms of market capitalisation.
Why would China need another bourse? With this move, the Chinese government aims to funnel more consumer investments into the stock market to fund innovation and the post-pandemic recovery of national businesses.
It’s especially important now since SMEs are experiencing a lot of pressure due to the US-China tension. For instance, the White House is now targeting Beijing’s widespread use of industrial subsidies. As those subsidies give Chinese companies an edge over foreign rivals, the US administration effort could lead to new sanctions on Chinese imports, not to mention the representation of Chinese companies on American stock exchanges.
In addition, the Securities and Exchange Commission (SEC) has said it will now require extra information from Chinese companies aiming to sell shares in the US. In particular, such candidates must better inform investors about political and regulatory risks. SEC envisions the enhanced disclosures included in corporations’ annual reports beginning early next year. The new details would likely include information about the businesses’ shell-company structures that may disguise business ownership from law enforcement or the public.
At the same time, Chinese authorities have also intensified their oversight of firms with share listings in the US. Therefore, the number of such businesses is slowly decreasing. As of May 5, 2021, there were 248 Chinese companies listed on major U.S. exchanges with a total market capitalisation of $2.1 trillion. On October 2, 2020, there were only 217 companies on the same list.
Besides, foreign investment is still prohibited and restricted in a number of industries, through the use of a so-called ‘Negative List’. Examples of industry sectors facing restrictions include the creative, energy, IT and telecommunications, automotive, and compulsory education segments. Therefore, Chinese tech businesses that wish to get hold of some Silicon Valley cash, find themselves between a rock and a hard place.
Meanwhile, the production in China is growing. Many businesses are expanding from mere outsourcing of separate processes to establishing the entire supply chain. Thus, tens of thousands of companies have established microchip businesses over the past year. As listing on American exchanges gets harder, the new bourse may become an excellent opportunity for startups to raise much-needed capital at home.
According to China’s securities regulator (CSRC) the planned Beijing stock exchange will be based on the city’s existing New Third Board. New Third Board is another name for the National Equities Exchange and Quotations (NEEQ). It is a Chinese over-the-counter system for trading the shares of public limited companies. Although it has been operating for almost a decade, the market for smaller companies has been held back by low investor participation and liquidity. After the planned reforms, the new Beijing Stock Exchange will be a part of the NEEQ, complementing the existing bourses.
China’s plans to launch a new exchange boosted shares in Chinese brokerages but significantly decreased the shares of Shenzhen start-up board ChiNext and also negatively influenced shares of Hong Kong’s bourse. The index of 56 brokerages trading on China’s onshore markets rallied by as much as 4.3% to the highest level since January. The growth was based on optimistic predictions that more listings by smaller companies will add to revenue generated from underwriting securities. A temporary decrease of the shares related to existing exchanges shows that investors fear competition will hinder their activities. According to Rock Jin, economist and CEO of investment adviser PopEton, it is only logical: “after all, it diverts capital away from Shanghai and Shenzhen markets.”
At the time of writing, no further details of the new exchange creation have been unveiled. Neither the President nor the securities regulator has commented on the approximate date of launch, so the terms of implementation remain vague.