Shanghai New Tech Board, China’s last Attempt to Regulate Finance Sector

07/05/2019

China is ready to be a game-changer in stock-market sector. The new bourse will relax rules on listing and trading, moves that Chinese leaders hope can one day be extended to other exchanges.

 

While China has some of the world’s biggest technology companies, many are listed in the US and Hong Kong. As Chinese President announced last year in November, Shanghai new Nasdaq-style tech board could be launched at the beginning of June. China is ready to be a game-changer in stock-market sector and Shanghai board main target is to compete with New York and Hong Kong while Beijing is aiming to boost funding for its hi-tech pupils.

What’s the plan? The “Science and Technology Innovation Board” is a key initiative by PRC to provide domestic funding support to Chinese hi-tech and innovative start-ups, allowing “New Made in China” products to compete on a global level in areas such as microchips, self driving cars and automation. But the new hi-tech board is clear response to investors – both Chinese and foreigners – to a better environment of Chinese stock market. Thus, why the new rules decided by Chinese authorities in finance sector will, maybe, change the stock-market game in Asia?

 

First, we should better define some terms for those who are new to the Chinese stock exchange, which was pretty much impossible to invest as a foreigner until rules changed recently.

 

As we know, in China, there are two stock markets, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange, both founded in 1990. Shanghai, as Chinese main financial hub, is obviously the bigger market, while Guangdong-based bourse, due to its special economic zone aim, has always been more for small and medium sized businesses operating particularly in hi-tech. First, the main key difference with other markets is that the Chinese exchanges are approval-based, not registration-based.

Plus, since the beginning, the China Securities Regulatory Commission (CSRC), People’s Republic stock exchange main authority, defined  three different types of shares that can be issued by Chinese companies, denoted by the letters A, B, and H. A (the yuan-denominated security of the company listed within China and it is really the only one you need to know); B ( foreign-denominated security within China) and H (mainly Chinese companies listed abroad or state-owned companies).

 

 

But Chinese stock-market is a different beast compared with American or Hong Kong one. To be list as a A-share company there are strict requirements, even don’t mention the possibility for foreign investor to navigate inside PRC stock exchange. In short words, actually CSRC curates the stock market offerings and is always CSRC that have authority to greenlight qualified companies and not approve other firms.  That’s why companies such as Meituan, Pinduoduo or Tencent Music decided to be listed overseas because the US and Hong Kong markets have no such rules.

Even if in previous years China decided for “accelerated timelines” for company though, we are talking about close to a year to get approvals, if you are lucky enough to be in the category of company that the government is hoping to promote at the moment.

 

This is China’s latest effort to stem the exodus of tech listings, especially as Hong Kong opens its doors to biotech firms. But the new Nasdaq-style board is also a deep reform of ChiNext index.

 

Most companies have to wait two to three years to get listed, and approvals are by no means certain. If we are lucky we are talking about one year, if the category of our company is one of them boosted and promoted by central government.  And that’s explain why almost 30 years in operations, there are only about 3500 publicly listed companies in China. Only a third of them in Shanghai and two-thirds in Shenzhen. Till now, these two main boards continue to be dominated by traditional industries such as real estate, finance, and industrials.

Now Beijing is promoting its “New Made in China” and PRC hi-tech founds need liquidity to move forward on their race. Plus, this is China’s latest effort to stem the exodus of tech listings, especially as Hong Kong opens its doors to biotech firms. But the new Nasdaq-style board is also a deep reform of ChiNext index.

 

 

Previously, due to tech companies are high growth, capital hungry, and mostly unprofitable, the Shenzhen Stock Exchange created ChiNext, or 创业板, was the exchange’s first attempt to mimic NASDAQ and get more high-tech companies listed.

Again, that didn’t work for a lot of internet startups. So China updated the rules to its Over-the-Counter OTC system, named it the National Equities Exchange and Quotations, or NEEQ , although no one really calls it that, everyone calls it the New Third Board, or 新三板. A real hi-tech chimera that thrown into confusion investors and firms owner. The main reason is that NEEQ is not technically a stock exchange and is owned by the Shanghai and Shenzhen exchanges and began operating in Beijing, expanding service nationally in 2012.

 

Finally, after several debacle Shanghai Stock Exchange’s Technology Innovation Board, or 科创板 being the latest attempt to create China’s NASDAQ.

 

What’s been the response? Actually everybody is very excited.  As we said, the most crucial change is the adoption of a registration – base listing system, which replaces the pronged regulatory vetting that kept many companies waiting for more than a year before listing.

Plus, according to the new rules, companies listing on the new board can trade freely for the first five days and will be subject to a 20% limit before is halted the 6th day of trade. These trading caps were useful in preventing excessive ramping of share prices avoiding the boom-to – bust cycles risk.

 

 

How does the fact that the Chinese exchanges are approval-based, and not registration-based, affect listings? In details, as SCMP revealed, unprofitable companies that have a minimum of 300 million yuan ($US44.6 million) of sales in the previous year are also eligible to file an IPO application. Pre-revenue biotech firms that have a market value of at least 4 billion yuan (US$595.5 million) are also eligible if they obtain licences from the national drug authorities. Of course the Shanghai exchange will review IPO applications, conducting a careful screening on earnings and operations before granting share listing approvals.

Actually, e-commerce names such as Alibaba are not listed on new board. The reason is easy to explain. First, companies such as Alibaba, Baidu, Tencent or Tik Tok, are already listed overseas in other bourse, plus, e-commerce companies such as JD or Alibaba have know-how and technologies to be competitive with western competitor, but they mostly oriented on consumers. Without doubts, firms such as Cainiao helped the automation of logistic sector in China, but comuses-oriented enterprises are not eligible for Cinese hi-tech race.

Right now, the new Shanghai hi-tech board will be launched at the beginning of June, but there are still uncertain over execution, timeline and core criteria of this new board. Without doubt People’s Republic new Nasdaq-style tech board will be a game-changer. The new rules already fuleded hopes among players and investors. But, without doubts,  US stock market is still by far for Shanghai new board. Hong Kong might be a more realistic goal, but maybe the final result will be a hybrid system where investor will face a kind of “approval based” system, but probably not so strict as the A-share market.

 

 

 

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