Caixin
Sep 03, 2021 09:54 PM
FINANCE

Four Things to Know About Beijing’s New Stock Exchange for Small Companies

China’s President Xi Jinping on Thursday announced plans for a new national stock exchange in the country’s capital Beijing that will become a platform for innovative small and midsize enterprises (SMEs) to raise money directly from investors.

The Beijing bourse will be the third on the Chinese mainland, adding to the markets in Shanghai and Shenzhen which are among the world’s top 10 stock exchanges by market capitalization.

“Spring is coming for SMEs,” one market participant said. “There are abundant listing resources for the Beijing Stock Exchange.” Since June 2019, the Ministry of Industry and Information Technology has identified 4,922 high-quality innovative SMEs, but only around 300 of them have gone public on the Chinese mainland, the person said.

Here are four things to know about how the proposed Beijing Stock Exchange (BSE) will support SMEs and the country’s capital markets.

How will the BSE be structured and who will be eligible to list?

The BSE will integrate the “select tier,” the top tier of the country’s over-the-counter stock-trading platform, the National Equities Exchange and Quotations (NEEQ), also known as the New Third Board. Founded in 2012 in Beijing, the NEEQ is an important fundraising channel for the country’s smaller businesses that don’t meet the listing standards for the Shanghai and Shenzhen stock exchanges. It was designed as an incubator for these companies to grow, become profitable and improve their corporate governance, and then graduate to list on one of the two bourses.

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Trading on the NEEQ is currently divided into three categories (link in Chinese): a “select tier” which comprises high-quality companies that have good profitability or strong innovation capabilities; an “innovation tier” for well-managed companies that are not good enough to enter the “select tier;” and a “base tier” for remaining ones. The “select tier” currently hosts 66 companies, with 1,250 in the “innovation tier” and 5,983 in the “base tier,” according to the NEEQ website.

The BSE will become a listing and trading platform for companies in the “select tier,” while those in the other two categories will remain in the over-the-counter market, according to the China Securities Regulatory Commission (CSRC). The 66 “select tier” companies will likely become the first batch to list on the Beijing exchange, a source close to the regulator told Caixin.

The Beijing exchange will be managed by the company operating the NEEQ, a source close to the issue told Caixin.

Why is China launching the exchange now?

The government has for years been pushing the financial sector to provide capital for SMEs and has launched several bourses to expand financing channels for them, most recently the STAR Market in Shanghai in 2019 that was also an initiative of President Xi. But policymakers have become increasingly concerned about SMEs’ continued lack of access to funding, especially innovative companies in emerging and high-tech industries. The BSE is part of a broader strategy to increase support for smaller businesses and help them tap investors directly for money rather than relying on banks.

The exchange will help enhance the capital market’s role in serving and nurturing SMEs, and promote the formation of innovative capital, said Xiao Gang (link in Chinese), a former chairman of the CSRC.

The BSE also forms part of Xi’s strategy to build a society of “common prosperity” and improve income distribution to tackle social inequality. As part of that strategy, China has stepped up efforts to tackle monopolies, tightened restrictions on the after-school tutoring sector, and cracked down on abuses and misconduct by internet giants.

The new exchange will also play a role in expanding funding channels for Chinese companies that face growing hurdles to listing in the U.S. amid rising tensions between the world’s two largest economies. Regulators from both countries have increased scrutiny of Chinese companies seeking to go public in the U.S. after ride-hailing giant Didi Global Inc.’s IPO at the end of June prompted Chinese authorities to launch an investigation into national security risks posed by domestic companies listing overseas.

Will individuals be able to buy shares listed on the BSE?

Probably. The NEEQ’s requirements for qualified investors give us a hint. Currently, individual investors who want to buy stocks in the “select tier” category must have a daily average of at least 1 million yuan (link in Chinese) in assets in their securities and capital accounts in the previous 10 trading days before filing an application to trade in the tier. They must also have at least two years of securities, funds or futures investment experience or certain work experience in relevant industries. Some experts expect the BSE will lower the investment criteria. Still, individuals who don’t meet requirements should be able to invest in the exchange through mutual funds.

How does the BSE fit in with the Shanghai and Shenzhen stock exchanges?

The BSE is part of China’s strategy to develop a multi-level capital market that will cater to the needs of all sectors of the economy for funding, improve access to capital, and give investors with different risk profiles the opportunity to diversify their portfolios.

The exchange should serve a different role from the Shanghai and Shenzhen stock exchanges in the capital market, the CSRC said in a statement (link in Chinese) released Thursday.

“Deepening the reform of the New Third Board and establishing the Beijing Stock Exchange are responding to the inherent needs of the capital market to better support the development and growth of small and midsize enterprises, and the inevitable requirement of implementing the country’s innovation-driven development strategy,” the CSRC said.

Denise Jia contributed to this report.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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