The Beijing Stock Exchange burst into life on Monday, with trading in the stocks of 81 companies, including 10 that are newly listed on the new exchange.
The 10 initial public offerings saw a rapturous reception, quickly running up to levels that have seen many of the stocks double or triple.
The other 71 companies have shares that were already trading in the "Select Tier" of Beijing's New Third Board, which trades over-the-counter stocks. Their performance on Monday is more mixed.
The Beijing Stock Exchange is the latest in a string of efforts to provide a capital base to support small- and midsize enterprises in China. Chinese President Xi Jinping announced the formation of the Beijing exchange at the start of September as the "primary platform serving innovation-oriented SMEs."
Chinese entrepreneurs and startups have long complained that they have limited access to capital. The main Chinese banks, all state-owned, favor lending to and provide their best rates to state-owned enterprises. Private businesses are forced to turn to other avenues, often paying much higher rates of interest.
Still, there's no guarantee that the early attention paid to the Beijing Stock Exchange will result in a deep capital pool, as I explained back in September. Prior efforts began with a bang but faded, leaving many companies trading on very light volumes, their shares apparently going nowhere very slowly.
The IPO companies receiving such a strong reception on Monday are:
- quartz-crystal maker Anhui Jingsai Technology 871981
- vapor-recovery equipment maker Beijing Henghe Information & Technology 832145
- gas-and-oil wellhead maker Chengdu Zhonghuan Flow Controls 836260
- civil-engineering design consultants CMEC Engineering Consulting 833873
- smart-city systems designer Hebei Zhisheng Information Technology 832171
- automobile-transmission maker Henan Tongxin Transmission 833454
- mining-robot maker Keda Automation Control 831832
- car-circuit maker Nantong Dadi Electric 870436
- big-data processor Shandong Hanxin Technology 837092
- data-analysis operator Shenzhen Guangdao High-tech 839680
Shares in Tongxin Transmission are the biggest gainers today, up 493.7% at the close, while Dadi Electric is up 261.8%, Zhisheng Information is up 239.0%, and CMEC, Keda, Guangdao High-Tech, Hanxin and Henghe have doubled.
Trading changes today are unlimited. There were 20 trading suspensions for the stocks of companies that had risen 30% or more, with a caution for investors to "pay attention to transaction risks" as well as to "invest rationally."
After today, shares will be allowed to move 30% in either direction in one day, compared with 20% on the STAR Market and ChiNext, and 10% on the main Shanghai and Shenzhen stock exchanges. Companies need only have an estimated market cap of C¥200 million (US$31.3 million) and a net profit of at least C¥15 million (US$2.4 million) in the last two years to list on the Beijing Stock Exchange, although they can qualify through operating income or R&D investment rather than net income if they have larger market caps. There are more details here.
China already has two stock exchanges that fulfill surprisingly similar roles. The STAR Market was launched in July 2019 as a wing of the Shanghai Stock Exchange, allowing listings of early-stage companies that are not yet profitable or have unequal classes of shares, while the ChiNext bourse dates back to 2009 as the Nasdaq-style arm of the Shenzhen Stock Exchange, targeting fast-growing tech companies.
So there's good reason to doubt that the Beijing effort will add much of anything. Like the STAR and ChiNext markets, the Beijing Stock Exchange is using a registration-based mechanism for its IPOs. More than four million investors are eligible to invest on the new Beijing exchange, with 2.1 million of them newly qualified as investors on the bourse, Reuters reports. Investors must have a two-year track record and at least C¥500,000 (US$78,000) in securities assets to qualify.
Academic-turned-regulator Xu Ming, now chairman of the Beijing Stock Exchange, says it will focus on the "pain points and difficulties" for innovative small businesses in China to get financing and retain talent.
In terms of geography, it does mean that the Chinese capital, center of the highly centralized government, is right on top of the new exchange. Shenzhen, China's version of Silicon Valley, is far to the south and just across the border from restive Hong Kong. There's a powerful Shanghai faction within the Chinese Communist Party that ties its allegiance to former Chinese president Jiang Zemin rather than current President Xi Jinping.
Shanghai is the current financial capital within mainland China, while Hong Kong is China's gateway in East Asia to overseas funding and capital markets. To have a stock exchange in Beijing therefore provides a new role for a city that's the clear seat of administrative power.
The Beijing Stock Exchange is taking over the 71 "select" listings on the existing stock exchange in Beijing, the National Equities Exchange and Quotations (NEEQ), colloquially known as the New Third Board. That started trading in 2013 as a venue for startups and high-growth small- to midsize businesses, with 7,033 companies now listed there.
The New Third Board previously had three tiers for companies, based on their quality: Select, Innovation and Base. The decentralized approach that China has taken to securities listing means that smaller companies have four options open to them, with the Beijing Stock Exchange potentially meaning much lower levels of listings and trading on the New Third Board, STAR Market and ChiNext.
Another unstated goal is to make it less attractive to list on international exchanges outside China. Until recently, New York was the destination of choice for Chinese companies with global ambitions. But over the last two years, many U.S.-listed Chinese companies have chosen to "move back home" with dual or secondary listings in Hong Kong.
Pressure is mounting from regulators in both Washington and Beijing that makes a U.S. listing less attractive, and it is not clear how long Chinese regulators will tolerate the Variable Interest Entity structure used by many tech companies to attract foreign investors. That shell structure lets international investors buy into an offshore, typically Cayman Islands, structure that has a contractual relationship to get the economic proceeds of an onshore Chinese company, sometimes in an industry that does not allow foreign investment within China.
