Anticipating China's Growth Enterprise Board

Cover, EO print edition no. 423
Translated by Paul Pennay
Original article: [Chinese]

In the past week，we've seen the release of a growing number of policies related to the establishment of China's new Nasdaq-style Growth Enterprise Board (GEB).

From the announcement of new regulations covering IPOs on June 5, to the June 8 call for input from investors, plus all the other measures that have been announced in the preceding weeks, we can see the structure of the new board is begininig to take shape.

The institutional design of the GEB is more detailed than those of previous markets, and, in terms of the qualifications for entry for both enterprises and investors, it is more specifically targeted.

The new board will have a positive effect on the development of small and medium sized enterprises, the transfer of industrial policy, advancing regional economies, optimizing structures and, most importantly, guiding the rational flow and distribution of social capital.

Everyone is united in their hope for a healthy, commercial and properly functioning board.

But of course, although our aims are clear, there is still a lot of work that needs to be done. The quality of the companies that list, and the regulation of the board, are two important questions that need to be addressed.

According to the draft rules of the GEB, the standard for a company to list on the board is that it has:

"Two consecutive years of profit, with net profit no less than 10 million yuan, and continuous growth; or one year of profit, and net profit of no less than 5 million yuan and operating revenue of no less than 50 million yuan over the past year with operating revenue growing at no less than 30% on average over the past two years;"

"The total capitalization of shares listed must not be less than 300 million yuan, and the issuer must also only deal in this one kind of business operation."

When compared to the requirements for listing on the stock market, these standards might seem low, but when looked at in relation to other Growth Enterprise Markets, the criterion are quite high.

Similarly, in regard to raising capital on the GEB, the qualifications required of underwriters are also quite strict.

These measures constitute a new approach, and to some extent, guarantee the quality of the companies that will list on the board.

But the market is still apprehensive, and with good reason too, about how these policies will be implemented.

In reality, the quality of companies listing on the main boards is also a big problem. In particular, a lot of improvement still needs to be made in the areas of public disclosure of information and the regulation of insider trading.

In addition to this, the high risk associated with investing in GEBs provides regulators with many additional challenges.

In other words, small and risky enterprises need tighter supervision and more market-oriented regulation. Therefore, regulatory bodies need to pay close attention and consider innovative policy to monitor these kinds of businesses.

However, a larger cause for concern is how to stop the GEB turning into a speculative tool.

By the end of 2008, in various cities around the world, 12 growth enterprise markets had closed down. Aside from the exceptions of Japan and America, all other markets had met with serious difficulties.

In reality, the history of Hong Kong's Growth Enterprise Market (GEM) can serve as a reference point for us.

In the past two years, there have only been four companies that have listed on the GEM. Daily business transactions don't even amount to one percent of the trade on the main stock exchange.

However, the biggest problem is that the listing regulations of the GEM are too loose, the senior management of listed companies frequently cash in their stocks.

Also, because the circulation on the GEM is low, venture capital, private equity and other major shareholders are better able to manipulate share prices.

We can forsee such boards enduring erratic rises and falls in share prices that would go well beyond anything that takes place on the main boards. This would have a negative effect on the stability and health of any growth enterprise board.

Until recently, the A-share market has carried the burden of having a reputation for its "speculative cycle", but now investors are also starting to worry that this phenomena might also emerge on the GEB.

Dealing with this problem will require a lot of ingenuity from the market and regulating bodies.

We think that the most important task for regulators is to devise methods to ensure the quality of companies listing on the GEB and to strengthen regulations managing the delisting process.

Among the regulations that have already been announced, we can already see that policymakers have drawn on the experience of other boards, however we still think they have some way to go in achieving this main task.

When we consider that this GEB, which has been mulled over for ten years, is about to come into existence, all the market players and government departments have plenty of ideas and expectations of how it will look.

How we can turn these hopes and dreams into reality will require more than good intentions, we need wisdom and to an even greater extent, we need courage.