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2021-09-07 13:43:58

Last Thursday, Chinese President Xi Jinping announced plans to set up a new stock exchange in Beijing catering to small and medium-sized enterprises.

“We will continue to support the innovative development of small and medium-sized enterprises, deepen the transformation of the ‘New Third Board,’ build the Beijing stock exchange, and strengthen the position of these entrepreneurs,” Xi said during a speech at the International Fair for Trade in Services in the Chinese capital.

The new bourse will be the Chinese mainland’s third major stock exchange — and the first to open since the 1990s, when China set up its first exchanges in Shanghai and Shenzhen.

But why does China need a new stock market in Beijing, and why now? Sixth Tone answers some of the key questions about the freshly minted stock exchange.

Why is China setting up a new stock exchange?

The main goal of creating the Beijing Stock Exchange (BSE) is to alleviate a longstanding issue in the Chinese economy: the difficulty faced by many small and medium-sized enterprises (SMEs) in accessing financing.

There are 40 million SMEs in China and the new exchange can take in hundreds, or at best thousands of them ... It’s just a drop in the ocean.

Though SMEs represent the backbone of the Chinese economy — accounting for 99.8% of businesses in the country and contributing 50% of the government’s tax revenues  — many find it “difficult and costly” to secure financial support, Zhou Jianhua, an analyst at Central China Securities, pointed out in a research report earlier this year. 

The Beijing Stock Exchange won’t be able to solve SMEs’ fundraising problems on its own, but it may be able to mitigate them, according to Yvonne Yu, a senior research analyst at the research firm Rhodium Group.

“There are 40 million SMEs in China and (the new exchange) can take in hundreds, or at best thousands of them. That helps, but it’s just a drop in the ocean,” she told Sixth Tone. “However, it’s important for identifying and helping the best of these SMEs.” 

Why now? 

The announcement comes amid heightened concerns over a potential “decoupling” of the Chinese and U.S. financial markets, with governments on both sides of the Pacific implementing policies that will make it harder for Chinese companies to go public on American markets.

In March, the U.S. Securities and Exchange Commission (SEC) adopted the Holding Foreign Companies Accountable Act — a law passed by the Trump Administration that will compel Chinese companies listed on American exchanges to undergo audits by a U.S. watchdog.

The new policy has the potential to force all Chinese companies trading on U.S. exchanges to be delisted — including tech giants like Alibaba, Tencent, and Pinduoduo — as Chinese regulations ban companies from giving foreign regulators access to their accounting records without government approval.

Meanwhile, China is encouraging companies to list domestically, as regulators worry Chinese firms transferring data overseas may create cybersecurity and national security risks. In early July, the Cyberspace Administration of China (CAC) announced that any company with over 1 million users must undergo a security review before listing its shares overseas.  

With the Beijing Stock Exchange set to focus on servicing fast-growing SMEs, experts say the move may be part of China’s effort to encourage startups to list domestically.

“Technology is a main battlefield for big countries. Now, Chinese tech stocks are facing threats in the U.S., and China needs to provide an innovative capital market to encourage them to return,” Liu Ying, a researcher at the Chongyang Institute for Financial Studies of Renmin University, told Zheng Bang Think Tank. “The development of the Beijing Stock Exchange can help support financing for SMEs and drive their growth.”

Yu from Rhodium Group said that while the BSE was “not set up to absorb firms delisted from the U.S., financial decoupling with the U.S. did expedite the process of its establishment.” It’s likely that many of the U.S.-listed Chinese firms will seek to be relisted on other stock exchanges such as the Hong Kong Stock Exchange given that they are well-established, she added.

Why Beijing?

Setting up a new exchange in Beijing appears to have been a long-term plan of the Chinese authorities. Locating it in the capital has both practical and policy advantages, experts say.

On a policy level, the new bourse may help rebalance the Chinese financial market. Beijing is home to China’s highest-level financial regulators and 87 “unicorn” startups with a valuation over $1 billion — more than any other Chinese city. Yet both of the country’s major stock markets are based in southern China.

The differences between northern and southern China have been widening — the north is falling behind.

“From an economic development perspective, the differences between northern and southern China have been widening — the north is falling behind,” Zhao Xijun, the deputy dean of the School of Finance at the Renmin University of China, told domestic media Time Weekly. “So one factor behind the decision is the imbalance of capital resources.”

In practical terms, Beijing has already been laying the groundwork for a stock exchange servicing SMEs through the National Equities Exchange and Quotations (NEEQ) — an over-the-counter equity exchange more commonly known as the “New Third Board.”

The New Third Board, set up in 2013, shares in the BSE’s mission to channel funding to innovative, fast-growing SMEs. But unlike a stock exchange, shares on the board are only available to institutional investors; retail investors are largely excluded.

The new stock exchange appears to be building directly on the foundations laid by the New Third Board. On Sunday, the Beijing Stock Exchange released its rules for listing and trading on the new market for public scrutiny — and the listing requirements are identical to those used by the New Third Board for its “select” tier.

What’s special about the “select” tier?

The 7,299 firms listed on the New Third Board are divided into three different tiers: base, innovation, and select. The select tier is the most exclusive and has the strictest requirements for companies wishing to be included.

Companies wanting to join the select tier must satisfy one of four criteria based on their financial performance and metrics such as investment in research and development, with the specific requirements varying based on the firm’s valuation. A company valued at 200 million yuan, for example, should have achieved net profits of at least 15 million yuan in the past two years or a return on equity of at least 10%.

Only 66 companies on the New Third Board have qualified for the select tier so far, including Linton Technologies — a photovoltaic and semiconductor equipment provider — and video monitor manufacturer Well Trans. As the listing requirements for the select tier are identical to the ones used for the new Beijing Stock Exchange, these firms will also be eligible to join the new exchange.

“The select tier has existed for over a year now … It has established a solid infrastructure for setting up the stock exchange from the perspective of enterprises, the market, and regulations,” the China Securities Regulatory Commission, the market regulator, said in a note issued shortly after President Xi’s announcement.

Editor: Dominic Morgan.

(Header image: People Visual)