China will soon open its own Nasdaq-like growth board, providing
a boon to Chinese start-up companies.
Getting finance used to be a big headache for Chinese start-up
companies.
But the difficulties will soon ease with the expected debut of a
Nasdaq-like growth board this year.
The China Securities Regulatory Commission's chairman Shang
Fulin said China's growth board would help establish a multi-layer
capital market.
Small- and medium-sized companies have been anticipating the
establishment of such a board for some time, and are expected to be
delighted by the development.
Back in 2000 when the Shenzhen Stock Exchange applied to
establish the Small- and Medium-sized Enterprise Board to
facilitate the growth of start-up companies, people expected a
platform similar to the Nasdaq which connected bright but
money-tight companies with investors who wanted to make a bet.
However, when the Shenzhen board started in 2004, the threshold
to get listed was not as low as expected.
It required a company to be profitable for three consecutive
years, generate at least 30 million yuan (US$4.1 million) in
collective earnings during the three years and have cumulative
revenue during that period of 300 million yuan - almost the same
criteria as the one for the main board.
"It is not what people expected," said Zhang Qi, an analyst with
Haitong Securities Co.
"The board does not fill the role as a platform to assist
start-up companies."
Zhang said the reasons behind the Shenzhen board's threshold
requirements included the bad performance of high-tech companies in
those days and the failures of a few boards of a similar nature in
foreign markets.
But the impact at the time of restricting easy access to finance
meant some companies shifted to the main board for funds, some
struggled to survive, some went to the illegal underground banks
and some others simply disappeared.
"The current system does not serve the demand of these
companies," said Zhang.
"They need money and may provide a handsome return."
"But the potential risks make the policy makers reject their
need," he said.
The situation is now changing.
By the end of last year, the Shanghai Stock Market reported
transactions worth 37 trillion yuan, more than triple the figure a
year earlier.
The smaller Shenzhen Stock Exchange's market value also reached
5.54 trillion yuan.
Moreover, China has been beefing up efforts to diversify
products - the regulator is preparing for the launch of a stock
index futures, which allows investors to sell short for the first
time on the mainland.
Shang Fulin noted the long-awaited growth board was now seen as
a logical and necessary step.
"We will push forward the debut of China's growth board to
establish a multi-layer capital market," Shang said.
"It is the demand to support the national strategy of
encouraging self-developed innovation and steer the economy from
labor and resource-intensive industries."
The draft rules for the growth board are also expected to
significantly encourage start-up companies.
The two-year earnings requirement will be cut to 10 million yuan
and the daily trading limit for the growth board will be expanded
to 20 percent, compared with 10 percent for regular shares traded
on the main board.
"The growth board is set to be an active market, producing
numerous opportunities but risks as well," said Sun Lijian, a
finance professor at Fudan University.
Similar boards in some foreign markets that have run into
problems would provide valuable lessons for the Chinese, he
said.
The Nasdaq Stock Market is among only a few ultra successful
boards for smaller companies.
Last year, Nasdaq became the largest United States exchange by
processing 29 percent of all equity trades by December, up from 27
percent in 2006.
"The key to Nasdaq's success and growth comes down to three
simple words: volume, volume and volume," said Sun.
"The United States has a deep-rooted tradition to support small
tech-related companies with high growth potential."
A dozen Chinese companies, including Sina Corp, Baidu.com Inc,
and Focus Media, picked Nasdaq as their base for the board's global
reputation.
Other boards, such as the Alternative Investment Market in
London's Stock Exchange and Growth Enterprise Market in Hong Kong's
Stock Exchange, were more lackluster.
Regulators in Hong Kong are even considering a plan to reshape
its Growth Enterprise Market, which did not attract a single new
company to sell shares on it last year and only six companies chose
it to make their initial public offerings in 2006.
"The deciding issue is to design rules both to take risks under
control and to make it attractive enough for small and medium-sized
companies," said Sun.
Key elements in the draft rules for the growth board
The company should operate for at least three consecutive years
with a clear-cut core business.
The company's two-year earnings should exceed 10 million yuan
(US$1.43 million).
The company's most recent yearly revenue should exceed 30
million yuan and should increase no less than 30 percent from a
year earlier.
The company's core business should generate earnings no less
than half of total revenue.
The daily trading limit will be 20 percent.
(Shanghai Daily February 18, 2008)
