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New Regulations for Listing on the Shanghai and Shenzhen Stock Exchanges

Cover, Issue 47, July 19
Translated by Tony Liu
Original article:

The Shanghai and Shenzhen stock exchanges have reached a preliminary agreement on how to deal with companies who apply to be listed on both of the two exchanges, the EO learned.

According to the agreement, non-financial companies whose planned stock issuance exceeds 80 million shares will only be allowed to be listed on the Shanghai Stock Exchange, while those whose planned issuance is below 50 million shares will go public on the Shenzhen Stock Exchange.

Those who plan to issue between 50 million and 80 million shares can choose for themselves which exchange, Shanghai or Shenzhen, they wish to be listed on.

In terms of financial companies, if their IPO exceeds 400 million shares, they will only be permitted to be listed on the Shanghai Stock Exchange; if their listing is below 400 million shares, they will have to go public on the Shenzhen Stock Exchange.

The EO learned that currently, the agreement has only been circulated among high-level officials in the two stock exchanges and among the China Securities Regulatory Commission.

Officials from the Shanghai Securities Regulatory Bureau and and sources close to the China Securities Regulatory Commission (CSRC) confirmed the news with the EO.

At press time, the Shanghai and Shenzhen stock exchanges could not be reached for comment and sources from the two exchanges and the CSRC declined to comment on the matter.

If everything goes well, the agreement will likely take effect in November this year, the EO learned.

Before the new rules come into effect, the two exchanges still need to work on the details of the agreement.

"The details [to be worked on] include how to coordinate companies' listing applications in the two stock exchanges and how to revise the listing rules and the codes for IPO companies," said a source close to the CSRC, adding, "Such changes will obviously increase the amount of work for the Shanghai Stock Exchange, but it won't have any complaints."

Once the agreement takes effect, the Shanghai Stock Exchange can attract some small-and-medium sized companies to go public on its exchange.

A source familiar with the agreement told the EO, "The gap in financing scale between the Shenzhen and Shanghai stock exchanges is widening."

"The Shanghai Stock Exchange, which used to dominate the field, has now had to compete with the Shenzhen Stock Exchange to attract the clients," said a manager of the investment banking department at Everbright Securities.

Thanks to the launch of the medium and small-sized enterprises market board in 2004 and the ChiNext board in June 2009, the Shenzhen Stock Exchange entered a period of booming development.

According to a recent report on the global IPO market released by the New York Stock exchange, in terms of funds raised, the Shenzhen Stock Exchange ranked first with 161 IPO proceedings raising 22.6 billion US dollars over the past half of the year.

The New York Stock Exchange ranked second followed by the Tokyo Stock Exchange and the Shanghai Stock Exchange. Although the recent listing of the Agricultural Bank of China on the Shanghai Stock Exchange has helped quickly increase the financing scale of the exchange, a senior manager at Guotai Jun'an Securities said the exchange would have few listing projects as large as the Agricultural Bank of China.

Dong Gexin, director of the Institute of Finance and Securities at Wuhan University of Science and Technology thought the new agreement would impact the the existing small and medium-sized enterprise board on the Shenzhen Stock Exchange.

Available data shows that of the total 100 IPO companies, apart from those determined to go public on ChiNext and the Shanghai Stock Exchange, 17 companies' new stock issuance exceeds 50 million shares.

If these companies all choose to go public on the Shanghai Stock Exchange, that would help increase the financing scale of the Shanghai Stock Exchange.

Rebalancing Interests

Prior to this agreement, there has been fierce secret competition between the Shanghai and Shenzhen Stock Exchanges.

The EO learned that the Shenzhen Stock Exchange set up over 30 representative offices across the country to lobby local companies to go public in Shenzhen.

The Shenzhen Stock Exchange also dispatches many workers to local securities regulatory bureaus to study, and by this means, it can accumulate market resources and directly communicate with the supervisory bodies.

Statistics show the averaged price-earning ratio is less than 20, while that for the small and medium-sized enterprise board and ChiNext on the Shenzhen Stock Exchange are 40 and 60 respectively.

Many investors believe if there are clear regulations for listing on the Shanghai and Shenzhen Stock Exchanges, the rules regarding their investment operations would also be changed accordingly and a new chain of interest, or perhaps even a historical opportunity, will emerge.

Some companies will likely choose to go public in Shenzhen to seek a high issuance price; others, like companies who plan to issue between 50 million and 80 million shares, will likely choose to be listed on the Shanghai exchange.

This article was edited by Rose Scobie

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