China's securities regulator plans to help start-up firms get the funds they need to succeed by starting a new enterprise of its own: a NASDAQ type exchange with lower requirements for initial public offerings.
The time is ripe to launch the Nasdaq-like growth board which is designed as an avenue for fast-growing start-up companies to raise funds," China Securities Regulatory Commission Vice Chair Yao Gang said in an online interview.
"Some people are worried that the launch of a growth broad is a piece of bad news for the main board, as it may distract capital," he added. "Capital is not a major factor deterring development of our stock market. We lack good investment products. Moreover, new funds will flow into the market if we can provide better choices."
Though the CSRC has not said for sure yet, it seems logical that foreign investors could participate in the proposed new exchange as they do in the existing exchanges — by means of Chinese Depositary Receipts (CDR), certificates that are issued by Chinese banks that represent pools of foreign equity traded on Chinese exchanges.
Like the American Depositary Receipts on which they are patterned, CDRs enable investors to buy shares in foreign companies without undertaking cross-border transactions.
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Pressure from domestic financial industry officials for setting up a NASDAQ-like exchange have been growing during the past year, as foreign exchanges step up their efforts to woo Chinese listings.
The new exchange will provide a new outlet for private equity investors, who have poured billions of dollars into China's rapidly growing economy. It will also bolster the fortunes of smaller firms unable to obtain funding from banks and the main stock markets.
The Shenzhen bourse has already contacted some 200 firms interested in the proposed new board, and the city's mayor says it can move forward immediately upon receiving final government approval.
The country opened an exchange in 2004 especially for listing small- and medium-size firms not able to join the more than 1,400 listed companies in Shanghai and Shenzen, most of which are state-controlled.
Draft rules now out for review draw on the experiences of overseas markets. They call for lower requirements for IPOs of "innovative and fast-growing" firms, the China Securities Regulatory Commission said in a statement on its Web site.
"This will help some small companies get the cash they need to grow," Harvest Fund manager Li Xin told Bloomberg News. "The listing rules are more relaxed."
Though the CSRC draft describes the proposed listing thresholds as "appropriately lower," firms must still meet certain profitability and capital requirements.
Companies seeking to list on the new exchange must have a minimum total share capital of 30 million yuan after their initial public offerings, have been established for three years, and reported annual net income of at least $1.41 million for each of the two years prior to applying.
Firms that can't meet these benchmarks must have posted net income of five million yuan in the previous year, had sales of more than 50 million yuan and annual sales growth of more than 30 percent.
A separate committee will be set up to oversee the start-up board. To take account of the higher-risk nature of start-up firms, the committee will have more members than the main board's listing committee.
China also plans to launch its first national over-the-counter stock exchange in the northern city of Tianjin. The Tianjin bourse will join the two stock exchanges in Shanghai and Shenzhen, and the planned growth board in Shenzhen.
China's financial institutions reported reserves of $5.6 trillion in February.
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