China’s announcement from CIIE, that it will launch a new NASDAQ-style board on the Shanghai Stock Exchange, signals a continued push for capital market reforms, which the nation hopes will channel critically needed financing for the businesses that bear the burden of driving the economy’s innovative growth.
Still, the timing of the new board’s launch needs to be worked out in line with the changing financial landscapes in China and abroad. Wide-ranging measures are also supposed to be in the pipeline to ensure well-functioning capital markets at large.
Chinese President Told The World that He Wants a ‘NASDAQ’
In a keynote speech at the opening ceremony of the first China International Import Expo in Shanghai, Chinese President Xi Jinping announced China’s decision to launch a science and technology innovation board at the Shanghai Stock Exchange and experiment with a registration system for listed companies.
In a statement shortly after Xi’s announcement, the China Securities Regulatory Commission said that the new board is intended to strengthen weak links in the capital markets that are related to technology and innovation. The regulator said that it will come up with differentiated arrangements concerning profitability requirements and shareholding structures, among other aspects, allowing for enhanced tolerance and adaptability for innovative businesses.
This apparently boosts hopes for welcoming back technology companies based in the Chinese mainland that had no choice but to float on overseas markets due to their failure to meet earnings requirements to list onshore. Many overseas-listed mainland companies use alleged ‘variable interest entity structures’ to bypass foreign ownership limits on some sectors, making greater tolerance for varied shareholding structures a much-needed move to open up the country’s capital markets.
“Companies with special ownership structures complying with related requirements and red-chip companies will both be allowed to list …,” the China Securities Regulatory Commission, the top securities regulator, said in an announcement on Jan 30, 2019.
Red-chip companies refer to mainland-based companies that are incorporated and listed outside the mainland, especially on the Hong Kong stock exchange and on bourses in New York, London and Frankfurt.
Analysts said the “special ownership structures” mentioned in the Jan 30 announcement refer to the structures of variable interest entity or VIE, which are adopted by some red-chip companies, especially internet companies such as Alibaba and Tencent.
Luo Wei, an associate professor at Peking University’s Guanghua Management School, said many mainland-based internet companies listed overseas wish to list at home, where they may even receive higher valuation as domestic investors appear to understand and recognize their business models better.
Once the new board sees red-chip companies listing, mainland investors can diversify their portfolios better, but need to spend more time understanding risks behind the complex VIE structures, Luo said.
The new science and technology innovation board is therefore set to provide a key missing piece in the country’s financial reforms, potentially turning these markets into the lifeblood of an innovation-oriented Chinese economy.
VS The New Third Board & ChiNext board
The launch of the new board can’t be rushed, taking into account global market uncertainties, particularly US stock market corrections amid the Fed’s rate hikes, and the still-fragile domestic stock markets.
In a sign of concerns that the new board and a pilot program for a registration-based IPO system might drain money from existing shares, the benchmark Shanghai Composite Index edged down 0.41 percent to once close at 2,665.43 points.
To ensure that the equity market in its entirety won’t be overwhelmed by a possible influx of IPOs, adding to woes over an inflated market, a set of measures including stricter de-listing rules and regulations to better protect smaller investors’ interests must be put in place as fast as possible.
Efforts are also required to clarify the role of the new board in relation to two existing markets – the New Third Board(新三板) over-the-counter market in Beijing and the ChiNext board（创业板） in Shenzhen which is widely known as China’s another version of the NASDAQ. After all, these other markets have been considered to exemplify the country’s efforts to ease funding shortages for smaller businesses involved in technology and innovation.
A Boost For Economy or Just Stock Market?
China is speeding up its bid to roll out the science and technology innovation board, backed by early progress in related reforms and a steadily recovering stock market, an analysts said.
As a significant step in capital market reform, the new stock trading platform is likely to launch in the first half of 2019, boosting innovation and improving market efficiency.
A meeting of the Party’s central committee for deepening overall reform held on Wednesday reviewed and passed the plan to launch the new board and experiment with the registration system, measures announced only about 80 days earlier.
Under the registration system, eligible enterprises can go public by filing required documents. Currently, the A-share market adopts the approval system, where regulators decide whether a company can be listed or not.
“China is making rapid progress in pushing forward the new board, which features the registration system, thanks to the sufficient preparation gradually done before,” said Li Ye, an analyst with Shenzhen-based Great Wall Securities.
The country initiated the reform of replacing the approval system with the registration system in 2013, with the following five years witnessing a full discussion of how to promote the reform, Li said.
Dong Dengxin, Director of the Finance and Securities Institute at the Wuhan University of Science and Technology, agreed.
“Over the past five years, the A-share market has continuously carried out reforms to implement the registration system, such as refining rules of information disclosure and de-listing. Now, it is proper to say the market is prepared to embrace the registration system,” Dong said.
“To prudently introduce the new system, China started the reform with the science and technology innovation board. One year later, more sub-markets may begin to adopt the system, helping to solve the existed problem of the Chinese stock market－excessive administrative controls,” he said.
On the other hand, recovery of the A-share market also underpins the rapid pace of rolling out the new board, Li said, because when investors are in a bearish mood, their worries about any shift of funds from existing boards to the new one can cause a plunge of the market.
“After last year’s slump, the A-share market has basically stabilized, and policies buoying the market have been continuously introduced. Meanwhile, the mitigating of trade disputes and relatively stable overseas markets also make the first half of 2019 an appropriate time to launch the new board,” Li said.
Detailed rules of the new board will probably be released in March, according to a report from the Shanghai-based Guotai Junan Securities recently released .
Launch of the new board could motivate enterprises to invest more in research and development and facilitate finance of tech companies, helping China achieve innovation-driven growth, the report said.
(Content edited from GlobalTimes.cn；china.org.cn)
Edited by Joreal Qian