China will set up a new stock exchange in Beijing to serve "innovation-oriented" small and midsize enterprises (SMEs), Chinese President Xi Jinping says. It's at least the third such effort in China, and prior editions have met with little success.
Xi says the Beijing Stock Exchange will be the "primary platform serving innovation-oriented SMEs." China has existing stock markets in Shanghai, the primary market for large companies and industrials, and Shenzhen, which tends to be tech-focused, with somewhat smaller companies.
Xi made his remarks at a meeting in Beijing. He gave a video address on Thursday to the Global Trade in Services Summit, part of a Chinese international services-sector fair.
The move will offer a new and local venue for companies that otherwise might have looked at an overseas listing. China has stipulated that any company with data on 1 million customers or more must submit to a cybersecurity review before any international listing.
China is also considering banning Chinese companies from going public in the United States altogether if they have "sensitive" consumer data. Officials have told some companies and international investors that Internet companies with user-related data will be blocked from U.S. listings, The Wall Street Journal reported last week.
The new Beijing exchange will function alongside the "New Third Board," full name the National Equities Exchange and Quotations Co. The New Third Board is an over-the-counter system for trading "joint stock" public limited companies that have issued private shares but are not yet listed in Shenzhen or Shanghai.
The New Third Board was launched in 2013 in Beijing, but there has been constant tinkering with how it works and thin trading. In April 2020, it started accepting for review listings of private SMEs that want to go public. There was much the same kind of rhetoric surrounding its debut, with the New Third Board designed for "innovative, startup and high-growth micro, small and medium-sized enterprises."
China's stock watchdog, the China Securities Regulatory Commission (CSRC), followed Xi's comments with an announcement of its own. It says the Beijing exchange will have a different role from Shanghai and Shenzhen, "expected to nurture a group of high-quality SMEs that are specialized and innovative," but will be linked to the other two stock markets.
The CSRC says its top leadership is "excited" about the new exchange, will study the president's proposal in depth, and will resolutely implement it. It will now set up the procedure for identifying which companies count as "innovation-oriented SMEs," as well as the mechanisms for stock issuance, listing, trading, delisting and supervision.
There's little detail and a lot of blather about the need to "foster a benign market ecosystem," but it is not clear why companies cannot list on the other two markets or the existing New Third Board.
Shenzhen is already home to the ChiNext market, which was introduced in 2009. ChiNext has less-stringent listing requirements from the main boards and targets fast-growing, high-tech companies as a kind of "Chinese Nasdaq."
Shenzhen also had a Small and Medium Enterprises Board until April 6, when it was merged into the main board of the Shenzhen Stock Exchange. The Shenzhen board said the move was necessary to create a "concise and clear market system."
The Beijing board appears basically to replicate or replace the Shenzhen SME board, with a "concise" and "clear" system no longer apparently the priority after all.
A Beijing exchange would bring the initial public offering process to the Chinese capital, and the north. It appears to de-emphasize Shenzhen, in southern China across the border from Hong Kong.
Shanghai launched its own Nasdaq knockoff in July 2019 with the STAR Market. Full name the Shanghai Stock Exchange Science and Technology Innovation Board, it allows listings for companies that are not yet profitable as well as for companies that have unequal voting rights between share classes. Neither kind of company would be able to list on the full Shanghai and Shenzhen exchanges.
The STAR Market was necessitated by the slowing and low trade on the ChiNext and New Third Board exchanges. Companies listed on them were languishing. The Beijing exchange would attempt to revitalize that interest, but it's not clear why it would work where previous efforts have not.
The Beijing market would be part of any plan to attract or restrict Chinese companies so that they go public within mainland China. Chinese markets are not freely available to international investors, with strict quotas on how many shares investment banks can trade. Overseas listings are therefore likely to retain their attraction for Chinese companies looking to expand internationally or benefit from a global investor base, assuming those companies are allowed to list abroad at all.SMEs complain that their access to finance is limited within China. Chinese banks, either state-owned or with large government shareholdings, favor state-owned enterprises, leaving smaller private companies starved for financing. The situation has intensified after China embarked on a crackdown on its "shadow-banking" sector in a bid to bring down leverage. However, it is China's state-owned enterprises that are the most bloated and inefficient companies, a sector Xi and his leadership team are struggling to reform.