n September 2, Chinese President Xi Jinping announced that China is to establish the Beijing Stock Exchange, which will become the primary funding platform for innovation-oriented small- and medium-sized enterprises (SMEs).
According to the China Securities Regulatory Commission, the country’s securities regulator, the Beijing bourse, which is expected to begin trading by the end of the year, is part of an overhaul and upgrade of the city’s National Equities Exchange and Quotations (NEEQ), also known as the New Third Board, which was launched in 2013.
Some 66 select companies among the thousands listed on that exchange are expected to be traded on the new market first.
The initiative will help address a major problem in China’s economy. SMEs face serious difficulties accessing capital funding in China’s financial markets dominated by big Stateowned banks which prefer big State-owned enterprises. Even non-bank investors tend to favor big firms or startups linked to them.
The result is that many independent startups, with almost no chance of obtaining funding, had no choice other than selling out to big tech firms. This allowed China’s big tech giants to expand rapidly and establish dominant positions in a wide range of industries through mass acquisitions, which has caused an unhealthy tech ecosystem.
By providing a designated funding platform on startups and SMEs, the Beijing Stock Exchange can address these problems.
According to some tentative operating rules released by the Beijing Stock Exchange on September 5, the bourse will be tailored to innovative startups and SMEs at earlier development stages than those listed in Shanghai and Shenzhen.
By promoting market transparency and capital liquidity, the board will help lower the risks involved in investing in SMEs, nurturing a healthy investment environment for this sector. Moreover, the Beijing bourse will provide a channel for domestic startups to list in China, rather than overseas, an issue that in recent months has triggered concerns over cybersecurity.
More broadly, the establishment of the Beijing Stock Exchange is a result of three decades of debate over whether China should create a third major exchange after those in Shanghai and Shenzhen. As China’s economy has become more complex, it needs to establish a multilevel capital market that is more dynamic and resilient. The Beijing Stock Exchange appears to be the answer.
As a trading platform, the stock exchange undertakes the important mission of experimenting with new rules and promoting the in-depth evolution of marketization.
For example, the Beijing Stock Exchange will not impose a limit on the price change on the first trading day, but trading will be suspended for 10 minutes when stock prices rise by over 30 percent or drop by over 60 percent. Daily trading movements will be restricted within 30 percent after the first day of trading, much higher than the Shanghai and Shenzhen exchanges.
By and large, the Beijing Stock Exchange will play a key role in promoting the much-desired innovation-driven growth. If effectively implemented, the Beijing Stock Exchange has the potential to become China’s equivalent of the Nasdaq, which was also aimed at innovative SMEs when it was first established.